Some people have been wondering if buying bitcoin is a solution to avoid inflation plaguing their country. While it is true bitcoin can be used as a hedge against fiat currency volatility, it works very differently from inflationary currencies. Bitcoin has no inflation model, yet it is not recognized as a legal tender by most governments either. Bitcoin can protect against inflation and hyperinflation, assuming the demand keeps up.
Bitcoin Versus Inflationary Currencies
The concept of inflation is not difficult to explain. There are two different causes for inflation: a currency has a rising supply, or there is far less demand for said currency. In both cases, more currency will come into circulation, which eventually means the prices for goods and services will – in most cases – go up. In the world of national currencies, inflation is usually caused by central banks who continue to print new bills, effectively creating money out of thin air.
In the traditional sense, Bitcoin is not subject to inflation, as there will only be 21 million coins. That has been hardcoded mathematically into the Bitcoin source code. However, there is a caveat, as the demand for bitcoin can wane over time which would cause a certain form of inflation. It would be very difficult to defend against such a development unless a few people decide to buy up the “excess” supply immediately.
Moreover, while bitcoin cannot be counterfeit or manufactured infinitely, the value per coin can still go down. As unlikely as it may sound to see Bitcoin go back to US$1 per coin or less, it is an option that should be dismissed easily. Should the number of freshly minted coins outweigh the growth of saving and trading BTC, things could get dicey very fast. This is part of the reason why bitcoin mining has block reward halvings.
Assuming the demand for bitcoin keeps up with current levels, cryptocurrency is a valid hedge against inflation. That being said, bitcoin will need to be adopted by more people to keep the momentum going. Once countries start to deem bitcoin legal tender, things will start to look very bright. At the same time, it is equally possible bitcoin will become “less appealing” to the masses, and people will stop using it altogether. Once again, highly unlikely, but it is not impossible either.
People looking to buy Bitcoin as a hedge against inflation have their homework cut out for them. If they feel bitcoin will not go anywhere in terms of mainstream adoption, there is little point in buying BTC to begin with. Finding the right balance between hedging against inflation and hoping Bitcoin goes mainstream is not an easy feat. Considering how the bitcoin ecosystem is still only eight years old, it is difficult to tell what will happen in the future.
In the end, buying Bitcoin has a very good chance to protect users against fiat currency inflation. However, one should not hedge against inflation with Bitcoin and hope to become rich overnight in the process. It is plausible the BTC price will continue to appreciate over time, but it will take many more years for that to happen. Right now, buying bitcoin as a hedge against inflation is risky, but the risk is no bigger than buying any other asset, currency, or investment vehicle.
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