For varied reasons, people invest in digital currencies. While some aim to book profits, others see this as a great way to increase their wealth. Still, there are many other individuals who witness this as a store of value. But most of them would agree that Bitcoin is a good safeguard in the times of inflation. In this article, we will see how inflation affects BTC prices.
Nations across the globe have started to pump trillions of dollars into their economies as the outbreak of COVID was ideal to test this theory. Many nations, including the United States printed more money to cater to the stimulus needs of their citizens. The asset values were pushed higher by the market jitters despite a crucial reduction in unemployment and global economic output. Hence, this year the stock market concluded with record gains.
Even BTC which is thought to be a speculative asset witnessed a historic price run of over 250% by 2020 end. Traditional investors who identify the potential of Bitcoin to operate as an object that can dodge inflation have contributed to these increases. However, the type of inflation that was expected by the investors has not yet been manifested. Inflation remained constant in the United States for the whole of 2020. According to experts, American inflation will be running rampant anytime soon. On the contrary, others think that a small amount of post-pandemic inflation is crucial.
There is nothing to hide that people purchase digital currencies for many reasons. Some people see this as a fast way to improve their money, while some use this for booking profits, while others think of this as a way to store value. However, many people believe that digital currencies, Bitcoin in specific, are a great hedge to inflation. Inflation affects BTC prices to a great extent and for the betterment of the economy. When inflation increases, the value of money decreases. Hence, many people invest in those assets that are likely to increase their value faster than inflation to hedge this recurring issue. The technique ensures that the net worth of the investment stays positive even while inflation consumes the value of their money. The remarkable increase of Bitcoin last year has attracted investors who think it can dodge inflation. As a result, rather than investing in real estate or gold many of them are shifting to the cryptocurrency space.
Now you may wonder why inflation affects BTC prices only and not other digital currencies. And why is Bitcoin the best crypto for inflation? The argument is that printing money by the central financial institutions will result in a reduction in the money’s value or inflation. On the contrary, BTC has a hard limit of 21 million coins that can be mined at any offered time. Thus inflation can be withstood by BTC because of its constrained supply.
The Idea Of Inflation Described
According to the United States Federal Reserve, inflation is an increase in the value of goods and services over time. But many relate this with an alteration in the supply of money or the total amount of money that is in circulation. According to Frances Coppola, an economist and CoinDesk columnist,
“In the Bitcoin realm, the term ‘inflation’ isn’t used in the same manner that economists use as a general rise in consumer prices. Instead, they tend to use it to refer to a growth in the money supply.”
Let us assume, you paid nearly $1.37 every pound for a bread loaf, which cost nearly $0.14 a pound nearly 70 years ago. Overall these years, the price has increased approximately ten times, and in this case, inflation is to be blamed for the rise in price. In an economy, a small portion of price inflation is advantageous. Thus, expanding the pricing of services and goods portrays a natural demand for those objects. On the contrary, when an economy endures from deflation, prices decrease, and businesses cut off workers or go bankrupt, offering a negative feedback loop. People can be confused by the idea of inflation vs deflation at times. The real story is that anything can be deflated or inflated, whether it is a bicycle tire or the pricing of a market. As a result, it is important to grasp what is being talked about when the terms deflation and inflation are stated.
Inflation of Bitcoin Supply and Protocol
As discussed before, anything from a bicycle to money in an economy can be inflated. Bitcoin was created to operate as money and also as a store of wealth, and Bitcoin inflation rate 2021 is created into the code. As you may be aware of, BTC is the fire that keeps the Bitcoin Blockchain operating and secure, and thus, the latest transactions are confirmed to the next block of the BTC network after every 10 minutes or so. Miners that verify those blocks are rewarded with freshly minted Bitcoin as a reward for their efforts. As a result, a new Bitcoin is added to the economy every 10 minutes and is available for spendings.
Satoshi Nakamoto automated a halving cycle into code to limit and stop the number of Bitcoins ever formulated. The compensation a miner gets is slashed in half every four years or so. Even though at a slower pace, Bitcoin is still being created. The next halving cycle is predicted at around 2024, and at that time, the formation of new Bitcoin will decrease even more. The reward will ultimately fall below 1 Satoshi, and no more BTCs will be formed. There will be only 21 million Bitcoins available at that time. However, it will not take place for some generations, since it is predicted to take place around 2140. The dearth of supply is among the primary reasons why people have been making investments in BTC. The quantity of BTCs that will ever be accessible is limited, and thus the cryptocurrency inflation rate can be calculated mathematically at any point in time.
How Inflation Affects BTC Prices?
Now that we are aware of the fact that the supply of BTC is unchanged; the demand for this crypto and the money availability in the economy will be the key elements that influence its price. It is a notion that the demand for Bitcoin will fluctuate because of a variety of variables. But in the case of BTC, even if it is in the initial stages of new technology acceptance, it can be asserted. As per a recent survey, 14% of Americans have invested in BTC, which hardly entitles it to widespread use. Perhaps taking the prices higher, it may be asserted that complete demand for BTC is predicted to rise as well.
Now, let us avoid the demand for sometime and assume that it will stay stable or rise modestly. How might the value of BTC be impacted by global fiat currency deflation or inflation? The answer is, while the important developed economies around the globe are rising their supply of money. When we have a global economy with more fiat currency in it and a fixed amount of BTCs, the Bitcoin price in the fiat currency will increase. The Bitcoin inflation chart is the best way to understand that.
Conclusion: What Should You Do?
By now we all know how inflation affects BTC prices. There is a usual cycle that is running right now that is advantageous, affecting the price of Bitcoin. To start with, when the economy slows down, politicians and central bankers rush to offer stimulus. That stimulus arrives from the printing of more cash, which ignites inflation. As inflation increases, central bankers may consider decreasing stimulus, which will result in the deflation of the supply of money. The economy then starts to suffer, and further incentive is planned. Bitcoin has reacted in favor of a series of such events. Bitcoin is not a hedge against inflation, and as a result, it has resulted in benefits in terms of deflation. The traditional response is that deflation creates stimulation, which is the reason for inflation causing the prices of Bitcoin to increase. As a result, if you have the tolerance to wait, then HODLing Bitcoin is a viable investment strategy for getting added Bitcoin at lower values. So now if anybody says that bitcoin is not a hedge against inflation, know that they are completely wrong.
Frequently Asked Questions On Inflation Affects BTC Prices
1. Does Bitcoin go up with inflation?
The argument is that printing money by the central financial institutions will result in a reduction in the money’s value or inflation. On the contrary, BTC has a hard limit of 21 million coins that can be mined at any offered time. Thus inflation can be withstood by BTC because of its constrained supply.
2. Is BTC a hedge against inflation?
Even BTC which is thought to be a speculative asset witnessed a historic price run of over 250% by 2020 end. Traditional investors who identify the potential of Bitcoin to operate as an object that can dodge inflation have contributed to these increases.
3. What causes Bitcoin to drop in price?
With increased demand, the price of Bitcoin increases, and with decreased demand the price of Bitcoin decreases.