© Stocksak Opinion: Why Doesn’t Bitcoin (BTC) Seem To Fight Well Against Inflation?
As inflation soars, everyone is looking for any kind of haven they can find so they don’t lose money. Many argue that cryptocurrency is an immunized store of value.
This is due to its decentralized nature, which is not tied to physical commodities. Understanding that each cryptocurrency has its own characteristics and some are inflationary by default adds complexity to the equation.
Investors who want to escape inflation through crypto investing will choose the most valuable currency on the market. But recent market trends have demonstrated that the original cryptocurrency doesn’t seem to fight well against inflation.
The question is: Why?
Why Bitcoin is Considered an Inflation Hedge
Simply put, inflation occurs when a currency’s value declines over time, causing an accompanying rise in the cost of consumer products and services. If the fiat currency’s value falls rapidly, investors might be more inclined to invest their savings in cryptocurrency.
Bitcoin is a stable investment option for such investors. Bitcoin’s economics are intricate, but the digital currency has several built-in features that might make it maintain value over time. It is immune to monetary policies interventions, such as interest rate changes made by governments or other bodies.
It is believed that Bitcoin, like other stores of value, will rise in value in times of uncertainty. Experts have recently argued against this view. Many people cite the COVID epidemic as an example of when Bitcoin’s price dropped quickly with the stock market.
Bitcoin is more convenient than gold in that it can be stored and transferred easily. Investors only need an internet connection to access Bitcoin. Its scarcity is another advantage. Although 19 million bitcoins have been mined so far, the Bitcoin supply is limited to 21 million. Interestingly,, the user friendly Bitcoin alternative, is expected to perform better than Bitcoin in 2022.
Inflation in Bitcoin Market
Inflation can occur in cryptocurrency markets, including Bitcoin market. As mentioned earlier, bitcoins lose value as more of them are mined. It’s similar to how the value of gold decreases when more becomes available.
The Bitcoin market’s inflation rates are not like fiat currencies. They actually decrease over time. This is because Bitcoin halving reduces mining reward by half every four year. If you’re familiar with how Bitcoin mining works, you should also have good knowledge of Bitcoin halving.
Once every ten minutes, the blockchain network receives 6.25 new bitcoins due to a new “block” that has been mined. As more bitcoins become mined, the mining rewards decrease. The mining reward will be halved, meaning that it will drop from 6.25 BTC (2022) to 3.125 BTC (2024). The reward will continue to decrease every four year until all Bitcoin has been mined.
Bitcoin’s yearly inflation rates are often not a big area of worry for investors so long as Bitcoin’s value rises versus fiat currencies. However, performance may differ for cryptocurrencies. Altcoin investors pay attention to developments in Bitcoin as it is the market leader.
Bitcoin Future and Inflation
The current drop in Bitcoin and other cryptocurrency prices is not due to inflation. It is a result of higher interest rates that are designed to drain the fiat markets of excess liquidity, curb inflation and support the U.S. dollar.
Since March 2022, when interest rate increases were first implemented, the cryptocurrency market has been in a downward trend. Bitcoin has yet to prove its inflation hedge status. So, in simple words, investors don’t just trust Bitcoin enough following these rate rises.
While cryptocurrencies like Bitcoin are becoming more scarce, their value is still largely determined by market sentiment. Although there have been reports about some businesses accepting Bitcoin for payment, widespread adoption of Bitcoin and stability has yet to occur.
If you’d rather not invest in Bitcoin against inflation, you can consider stablecoins. Stablecoins are backed by fiat currency and are a low-volatility cryptocurrency that can be used for long-term investments.
These coins could experience value erosion over the course of time, but they are not directly affected inflation. The value of stablecoins is affected by the decline in the reserve currency’s value.
- Because of its fixed supply, bitcoin could still be a good protection against inflation. Bitcoin’s inflation risk is limited to 21 million bitcoins.
Why You Should Care
Bitcoin’s price has dropped dramatically this year as the world struggles with inflation. Bitcoin has traded between $18,000 and $25,000 since the November crash that saw the global crypto market collapse to its peak. The low was $16,000, while the high was $25,000.
You can read more about Bitcoin inflation fears here and Bitcoin sell-offs there:
Inflation Fears intensify Sell-Off, Putting Bitcoin Below $27,000
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