Bitcoin (BTC) and other cryptos in the digital ecosystem experienced an unprecedented patronage during the COVID 19 pandemic – this is not a coincidence. Bitcoin (BTC) is best traded on stable portals like Bitcoin Boom, and is often looked at by a lot of people as inflation-proof.
In fact, this is why many passive investors think it’s a great investment choice – this is not incorrect, yet is untrue.
In this article, we are going to highlight the inter-relationship between Bitcoin and inflation. How do they affect each other?
What really is inflation?
In the simplest of terms, inflation can be best described as a combination of two things:
- a currency losing value
- uptrend price of consumer goods
That is, a situation where it takes the currency of an economy more figures to purchase certain units of consumer goods and services. This can be caused by many things, but they are almost always linked to politics.
Inflation affects any service, product, commodity, or utility – cost of getting these go up thereby making the money needed to get them get less valuable.
How does inflation affect Bitcoin (BTC)?
Although their governments denied it, many countries printed a lot more money during the Covid 19 pandemic. It was a dire situation. Entire industries like hospitality and air transportation were effectively grounded. People went sick, mass unemployment, and the least on anyone’s mind was to stimulate economic activities of any kind.
The governments printed more money to cater for the stimulus cheques that were handed out to citizens. According to McKinsey Global, governments around the world already handed out over $10 trillion as of June 2020. This effectively drove the value of money down, and the value of assets with a limited supply like stocks, real estate, and FMCG shot up.
This was when Bitcoin started attracting many investors, especially those who wanted to pull out of the inflated economy and hedge their funds against it. The oversubscription and demand for more Bitcoins drove the price of Bitcoin up over 250%.
Is Bitcoin “inflation-proof”?
For centuries, gold has been the best commodity to hedge your investments against. This is because the value of commodities like gold rarely sways – there is always demand for gold, and there is always limited supply for it.
In a way, Bitcoin is like gold in terms of economic features:
- Limited supply
- Mining is costly
- Decentralized (not controlled by any Central Bank)
- Steady demand
So, these two major things work greatly for cryptocurrencies. First, the decentralization of Bitcoin obviously cuts across many economies and countries of the world, it is not limited to the laws of any country. Also, cryptocurrencies are limited in supply, partly because they are extremely difficult/costly to mine.
It would be more accurate to refer to Bitcoin as “inflation-resistant”, rather than “inflation-proof”.
What Should Traders Do When Inflation Hits?
Originally, Bitcoin was created in the middle of the 2008 great recession. The financial turmoil was so dire that stakeholders and customers of banks totally lost all their confidence in the banking system. So, in theory, cryptocurrency (Bitcoin) was a response to the centralized banking system which was easily manipulated into a total breakdown.
When an economy goes into a recession or there’s raging inflation, the unpleasant effects of the inflation are most felt by the official currency of the economy. For example, if the United States goes into a recession, the bad effects of the dwindling economy are borne by the US Dollar. The US Dollar is subject to the laws of the United States so the situation weakens the currency, unlike Bitcoin. Cryptocurrency cannot be subject to anyone country’s law, issues, prosperity, or problems as it is not owned/controlled by any one entity.
As a trader, industry watchers will always recommend that you should be sure that your cryptocurrency, depending on how stable it originally is, will store its value regardless of slight economic changes in one economy or the other. The only time you should take drastic decisions to save your investment is when huge changes (that also probably cut across many economies) occur.
Information contained on this article are just that – a piece of information. You should not use this to make financial decisions and we highly recommended you seek professional advice from an authorized expert.