Backers of Bitcoin (BTC) have frequently touted it as a perfect safeguard against inflation, based on the belief that traditional fiat currencies will inevitably lose value due to excessive money printing by central banks.
During the COVID-19 pandemic, money supply increased in the economy as the governments created stimulus programs for their respective citizens. By June 2020, McKinsey Global reported that $10 trillion had been provided to avert the worldwide crisis. With increased money supply and production in most companies grounded, money lost much value.
Unlike fiat currencies, though, Bitcoin operates on a fixed supply of 21 million coins, and this restricted upper limit grants it a significant advantage in combating inflation. Yet, the question remains: Can Bitcoin genuinely be considered inflation-proof?
What’s inflation, and what’s its rate in the UK?
Inflation is an increase in consumer goods prices, where the currency shades off its value over time.
But the concept of cryptocurrencies like Bitcoin, which have limited supply, is to beat inflation. As a result, these digital currencies often exhibit low inflation rates, setting them apart from traditional fiat currencies. In particular, Bitcoin is a prime example of the unique inflation dynamics.
Currently, in the UK, the country is yet to recover from the highest inflation rate in 40 years, which peaked in October 2022. There is a small relief as commodity prices attempt to stabilise, with the annual inflation rate declining to 7.8% during the 12 months leading up to April 2023, showing a decrease from the peak of 8.9% recorded in March 2023. Despite this modest improvement, inflation remains a significant concern for the UK economy.
Gas prices saw their first decrease since October 2020, dropping by 1% between March and April of this year, following a 66.8% increase between the same two months a year ago.
The gas prices alleviated some pressure on other sectors, resulting in the annual inflation rates for housing, water, electricity, gas, and other fuels falling to 7.3% in April 2023, down from 11.6% the previous month. House price growth also slowed, but private rental prices rose by 4.8% in April 2023, up from 4.7% in March 2023, representing the largest annual percentage change since this UK series began in January 2016.
Hedging Against Inflation
As cash loses value, you don’t want to hold onto it as you would lose your savings. You are inclined to put your money somewhere there’s a promise of better returns, like gold, real estate, stocks, and crypto. You do so to protect the purchasing power of your money. This action is what we call hedging against inflation.
But in an inflationary environment, hedging is not an easy feat.
As a store of value, the asset should lose value over time, and it should be accessible but scarce and durable.
Over the years, most people have used stocks, real estate, and precious metals (physical gold and silver), which all share these properties. But so do cryptocurrencies like Bitcoin.
While these traditional hedging commodities (gold, real estate, and stocks) have helped, they have had their limitations. Gold and silver are less dependable for short-term investors, and 2021 showed them consistently decrease in value.
Real estate is not a bed of roses, either. Converting your real estate investment into cash is not as easy, and holding onto them is also costly, with ongoing responsibilities like taking care of the property. While investing in stocks requires advanced financial knowledge and skills, which most regular people don’t have.
Cryptocurrencies like Bitcoin could be a perfect solThat’s why many are turning to cryptocurrencies as a hedge against inflation.
Another point is that central authorities still influence traditional assets like gold, silver, and fiat money, making them vulnerable to biases and external pressures. Governments can manipulate their price outcomes with the push of a button.
Is Bitcoin a good inflation hedge?
An effective hedge against inflation should possess four crucial properties:
Bitcoin outperforms stocks and real estate as an inflation hedge due to its low maintenance requirements. Besides, anyone, including staying-at-home moms, can invest in Bitcoins as it doesn’t need specific skills or expertise.
Bitcoin is a perfect store of value because of its ability to outwit inflation. Its limited supply, with a cap of 21 million coins, and slowing production rates over time, makes it scarcer than even gold. With a vast network of nodes worldwide, it is resistant to external attacks and ensures its limited supply remains intact.
Another important factor is that no one controls Bitcoin, not even its pseudonymous founder Satoshi Nakamoto. So, users have little to worry about the government or any central authority controlling its supply. It self-regulates, maintaining its decentralised and resilient nature.
How inflation impacts Bitcoin prices?
Bitcoin’s value has grown faster than inflation, so many see it as a way to protect themselves against inflation. But each person may have different goals, like making money, increasing their wealth, or using it as a safe place to store their value.
The remarkable rise in Bitcoin prices shows that the value stored in this cryptocurrency has increased more quickly than inflation. Even in 2021, a relatively calm year for Bitcoin, its value grew by 59.8%, much better than inflation rates in many countries.
When their traditional currencies lose value in economies facing challenges, people often turn to Bitcoin to safeguard their savings, increasing the demand for Bitcoin and driving up its price. So, it’s a popular choice for protection against currency devaluation.
How to Buy Bitcoin and Other Cryptocurrencies
Beyond serving as a store of value, cryptocurrencies like Bitcoin offer opportunities for profit through forex trading, similar to traditional currencies.
Cryptocurrency trading, facilitated by brokerage platforms, involves the buying and selling digital currencies on an exchange.
Using leveraged derivatives called CFDs (contracts for difference), you can buy or sell based on your expectations of price movements. Also, you can select from a diverse range of cryptocurrencies, open a CFD trading account, analyse the market for trading opportunities, effectively manage risks, and actively monitor and close their positions. You can learn more about this at TradingGuide.co.uk.
How Bitcoin Performs as a Hedge against Inflation
If Statistics is anything to go by, so far, so good for Bitcoin. The leading digital currency has exemplary results against inflation, much better than gold, and much of this is due to its underlying strength - scarcity and decentralisation.
Even as you use Bitcoin as a hedge against inflation, you should look out for extraneous factors like the regulatory environment. Some countries have tried to fight the digital currency by banning it, but it still stands.
Bitcoin is the best store of value because, like gold, it is widely accepted, highly liquid, scarce, easily divisible, and portable, and no central authority controls it. So instead of watching as inflation makes you lose the value of your savings, invest in Bitcoin and watch your investment grow.