Some believe that Bitcoin is an inflation hedge because the money supply doesn’t increase, unlike in fiat currencies. As a hedge against inflation, many believe that Bitcoin’s purchasing power doesn’t reduce because it has no inflation rate. Cryptocurrencies like Bitcoin do not have a central bank that creates monetary policies to alter the amount of money released. Only 21 million Bitcoin will ever be in existence, and this intrigues those that want a store of value.
What is Inflation?
In the U.S, many investors have made their concerns about the inflationary tendencies in the economy because of a rise in the volume of dollars the Central Reserve is printing. Many are thinking of opting for crypto like Bitcoin.
Initially, inflation is seen as a rise in the volume of fiat currencies that is printed by the government, but this seems to be changing. Before, this concept focused solely on the amount of money printed.
Now, inflation covers the consumer prices and the price level in the economy. When the amount of money printed or the money supply increases, this is called monetary inflation. The second type of inflation is price inflation. Though the inflation types may be different, economists say that inflation is generally linked to the money supply.
Is Bitcoin good against inflation?
Bitcoin is immune to monetary inflation because the number of coins is limited and fixed to 21 million Bitcoin. It is unlike fiat currency where the government, through its Central Reserve, decides the money supply within a year and changes the plan for last year in the current period. Since the COVID pandemic, the US government has been printing more money, which has made the world news, while changing the economic view of the country.
The fixed supply of Bitcoin is gotten through mining. Once every bitcoin has been mined, it is expected to become deflationary. More coins will be lost as people lose their wallets, meaning that the Bitcoin in existence is expected to decrease in number.
For the price inflation context, Bitcoin is said to be inflationary because the value of the coin tends to be on the increase, which is higher than what an average person can afford.
Also read: How does a cryptocurrency value increase?
What is the inflation rate of Bitcoin?
A great characteristic of a good store of value is scarcity. Since the crypto has a total fixed amount of 21 million, it means that traditional inflation may not be feasible here, and it falls under the good store of value category.
Over 80% of the total Bitcoin supply has been mined, making the system incorporate more complexity in the mining process. By adding more complexity, miners have to consume more computing power to solve complex problems. Each day as the 21 million Bitcoin threshold is reached, it becomes more advanced to mine.
According to Bitcoin.com, the inflation rate of Bitcoin is at 1.77%, which is lesser than the inflation rate of the United States, making many consider it as a good store of value.