Historically, it has always been the case that when inflation occurs, investors save their wealth in long-term stable investments.
It has been gold for a long time. But now we have cryptocurrencies. Are they really an effective protection against inflation?
Inflation and deflation
Investors, who invest in cryptocurrencies, sometimes forget about the macro-level trends that drive our economy. They got used to see daily, even hourly market movements. We generally know that inflation occurs when the purchasing power of money decreases. However, it most often occurs when the money supply increases. An example is the Fed, which prints billions of dollars.
The opposite is deflation, which is another danger. Prices are falling and the value of money is rising. It is important to note, however, that inflation can only occur in fiat currencies – currencies that are based on confidence in growing gross domestic product.
Is Bitcoin really deflationary?
People see protection against inflation in Bitcoin. Why? Because there is only a limited amount of it. Like gold. This is a fact that many people forget. Many cryptocurrencies have a given limit. With Bitcoin, it’s 21 million coins.
Therefore, one day it should happen that the price of Bitcoin will rise when demand is greater than supply. And here’s the stumbling block. We are not even close to the end of this limit, which will occur in about 2140. So is Bitcoin really a deflationary asset?
For at least another 120 years, Bitcoin will not be able to act as a completely stable hedge. So why is it so popular with people and investors?
Of course, it doesn’t even have to matter. People like Bitcoin mainly because of the balance between stability and variability. At this time, many people and investors consider Bitcoin, and cryptocurrencies in general, to be a stable hedge against inflation.
However, it is not good to consider cryptocurrencies as a mere substitute. They provide much more than just security. Follow us to find out more about the possibilities of digital currencies in one of our future articles.