One of crypto’s key charms has been its invulnerability to inflation, which has been advertised as a safe haven against inflation in central bank currencies. Institutional investors are investing money into Bitcoin as a “better inflation hedge than gold,” according to a JPMorgan Chase analysis from last October. The rationale is that the supply of various cryptocurrencies is fixed, as explained in a blog post by the crypto exchange Coinbase. There are only 21 million tokens in circulation in the case of Bitcoin. The amount of Bitcoin mined is cut by half every four years. As a result, the coin’s scarcity should have a greater impact on its value than traditional economic reasons (and insulate it from inflationary pressure from more supply).
Does Bitcoin provide inflation protection?
There are disagreeing (or, at the very least, opposing) viewpoints from people like:
- Morningstar. The investment ratings agency stated in a review of the evolving stages of inflation in the United States, “The claim that hedges against inflation is based on a small amount of evidence. While it’s plausible to believe that bitcoin will aid in the survival of a portfolio against inflation’s ravages, this is far from certain.”
- Bank of America is a financial institution based in the United States. The bank discovered that “The justification for holding Bitcoin is not diversification, falling volatility, or inflation protection, but rather simple price appreciation,” he continued, “since commodities and even equities give better correlations to inflation.”
What is Bitcoin’s approach to inflation?
Bitcoin is basically a deflationary asset, which is why citizens of countries with unstable fiat currencies are increasingly using it as a store of value to protect against hyperinflation and growing costs of common goods and services. Crypto, unlike fiat currency, cannot be manipulated as easily as fiat currency by changing interest rates and increasing money production. Most crucially, Bitcoin’s supply will never surpass 21 million, making it a desirable inflation-resistant store of value. While Bitcoin has grown in popularity over the last year, the crypto market’s volatility remains a contentious issue.
Is Bitcoin inextricably linked to inflation?
Despite its limited supply and the famous “store of value” idea, Bitcoin continues to trade with high volatility and a closer correlation to risky assets such as equities than traditional safe havens such as gold. However, it is not inflation that is driving this price movement. The Federal Reserve of the United States has suggested that it will raise interest rates this year to absorb some of the excess liquidity in the economy, strengthen the dollar, and bring inflation under control.
Why is Bitcoin devoid of inflation?
Bitcoin has a limited amount of 21 million coins, thus its value cannot be inflated. The significance of a steady supply cap ensures that all Bitcoin owners are aware of their overall ownership of the currency.
What makes Bitcoin a good inflation hedge?
The concept of Bitcoin as an inflation hedge is straightforward. The total number of Bitcoins is limited to 21 million, but the total number of US dollars increases over time. If the quantity of the US dollar increases, the value of Bitcoin in dollars should increase as well, assuming all other factors remain constant.
Here’s a very basic illustration of Bitcoin’s worth if the supply of dollars doubles. In all cases, I assume that the “market cap” of US dollars and Bitcoin is equal.
What happens if every single Bitcoin is mined?
One of the more pressing concerns is that even if all bitcoins were mined in the future, there would still be a shortage of 21 million bitcoins in circulation. One-fifth of all bitcoins mined have already been lost, according to Chainalysis, a blockchain analytics business.
Is cryptocurrency a better investment than gold?
According to a new analysis from Fidelity, the world is saturated with cash and cryptocurrencies, but Bitcoin is unique, with the potential for large price growth.
Bitcoin is a limited resource “The corporation claims that it is “a monetary good” that is “better in many ways than other cryptos, gold, and even government-issued money like the dollar.” “In an interview with Barron’s, Chris Kuiper, director of research at Fidelity Digital Assets and author of the analysis, said, “We would expect Bitcoin to be a lot higher five to ten years from now.”
How do you protect yourself from inflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.