Bitcoin as a Hedge against Inflation

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Cryptocurrency enthusiasts have described bitcoin as the world’s best hedge against inflation. Find out how bitcoin can hedge against inflation.

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The increasing scale of bitcoin adoption into mainstream institutions has made it a strong competitor against the traditional hedges against inflation. The recent bitcoin rally by many global investors and corporations signifies that digital currencies could offer the best protection against rising consumer prices.

Critics also argue that bitcoin is still in its early stages of mainstream adoption. As a result, it is premature to justify it as a hedge against inflation. Nevertheless, bitcoin has various characteristics that qualify it as a hedge against inflation, as discussed below.

 

Limited Supply

Unlike fiat currencies, where central banks regulate supply, Bitcoin has a capped supply. That means its circulation is not subject to any central bank or government influence. Inflation usually occurs whenever the central banks print too much money, significantly reducing the value of fiat currencies and other assets tied to them. Availability of too much money in circulation causes a surge in the economy, thus, driving inflation through the roof.

On the other hand, Bitcoin is not subject to any form of regulation either by the government or central bank. The supply of bitcoin is capped or programmed to a specific limit of 21 million, which it cannot exceed. Currently, about 18.6 million are already circulating in the global market. That contributes to scarcity, allowing bitcoin to hold its value much longer than most traditional financial instruments; hence, offering its users better protection against induced inflation.

 

Bitcoin Price

The increasing Bitcoin price amidst the global financial crisis is another indicator of its more significant role as a hedge against inflation. Fiat currencies and other traditional financial instruments are pretty vulnerable to economic problems, as witnessed during the COVID-19 pandemic. Unlike oil prices and even logistics costs that grow with the economy, bitcoin price entirely depends on public perception.

Although bitcoin price has also dropped over shorter durations in the past, it has demonstrated quick recovery and growth amidst the ongoing financial crisis. That has resulted in many investors and corporations acquiring bitcoin holdings as security against looming inflation. Bitcoin is a highly volatile currency but, market analysts have predicted continued growth in its price. Therefore, it could effectively cushion investors from the negative impacts of inflation.

 

An Unregulated Financial Instrument

In most developing countries, especially those experiencing frequent political instability, governments have absolute control over all financial institutions and activities. They could indefinitely close bank accounts and seize people’s wealth. That makes managing money and assets almost impossible for individuals and companies. Such actions impact severe financial crises that often contribute to inflation.

Bitcoin serves as a hedge against inflation in such economies since it is not subject to government or political influences. Users keep bitcoins in digital wallets, which are inaccessible to any third party. That allows individuals and companies with bitcoin holdings to conduct transactions across various platforms at their convenience freely. Today, there are multiple online bitcoin trading platforms such as BitQT that you can join for free to start trading.

 

Bitcoin Security

As a virtual currency, all bitcoin transactions are electronic and recorded in a digital public ledger. Besides, the transactions do not involve third parties as experienced in fiat currency exchanges. That ensures no one can manipulate the systems for profitability or other economic gains, even in times of financial turmoil. The hi-tech security allows bitcoin to maintain its value as a store of wealth, cushioning investors and asset managers from financial risks.

Although some critics argue it is still early to describe bitcoin as a hedge against inflation, its unique qualities discussed above clearly prove it could effectively protect investors from the risks of rising consumer prices.

 

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