As global inflation escalates, Bitcoin saves the day

[ad_1]

Many contributing factors have led to an increase in inflation, to which bitcoin offers a loophole.

The world breathes a sigh of relief as things normalize after the devastation of the Covid-19 pandemic. Governments lift blockages, restrictions are relaxed, and the economy is slowly returning to some semblance of normalcy. As a result, consumer spending is on the rise.

Inflation is on the rise

In April, CNBC reported that consumer price inflation in the United States was up 4.2% from the previous year. In addition, in June, the consumer price index rose 5.4% from a year ago, the largest increase since the global financial crisis of 2008. Excluding energy and food, the CPI of base increased by 4.5, the largest increase since 1991.

Now the big question is, what causes high inflation?

Increase in money supply

The Federal Reserve has resorted to flooding the economy with dollars to curb inflation. According to Forbes, the M2 money supply in April 2021 was $ 20.11 trillion, which is a 30% increase since January 2020. Too many dollars in the system reduces the value of the currency.

In addition, there is a pent-up demand for more money for fewer products, which exacerbates the problem of inflation. Remember that when the COVID-19 pandemic hit, some manufacturing plants were closed while others downsized their operations. As a result, the market has exhausted its stocks. Likewise, the demand for airline tickets is on the rise again.

Manufacturers are working against the clock to meet demand. For example, the pandemic has affected automobile production. As a result, the cost of used cars and trucks is higher than ever. The point is that a limited supply of goods, coupled with the expansion of the dollar in the economy, leads to inflation.

What is the inflation debate in the United States?

The real inflation rate is a growing concern, especially among economic policymakers. While the whole discussion can be confusing for the masses, it is vitally important. The next course of action could result in an economic slowdown, higher mortgage rates and high volatility in stock prices. For these reasons, incoming economic data will be essential for financial analysts, policymakers and economists.

According to AP News, Federal Reserve Chairman Jerome Powell says the spike in inflation is transient, caused by the reopening of the economy after the pandemic. While the Federal Reserve maintains that the inflation rate will on average be above 2% and then decline, many economic experts take a different view.

According to the Bank of America strategist, Michael Harnett’s inflation could rise to 4% and persist longer than the Fed announced. David Roche, chairman of investment firm Independent Strategy, agrees. He said inflation could reach 3-4% by mid-2022. This could cause a crisis in the financial market and the US economy as a whole.

Thinkers say the Fed’s measurement tools don’t match consumer spending. In other words, the inflation experienced by consumers is underestimated. Once consumers start to feel the effects, they are likely to demand higher wages, which initiates a vicious cycle of inflation.

Effects on other countries

Inflation in the United States will not spare other countries. High inflation will make the US dollar more attractive against other countries. Therefore, these countries are likely to experience capital outflows as investors seek high returns. The result will be market volatility, slow economic growth and a high interest rate.

This means that countries with loans denominated in dollars will find it difficult to repay their loans. In the worst case, some countries could experience a recession. Needless to say, the whole world is watching, and they want to see how far it goes.

Bitcoin The best hedge against inflation?

Inflation fears are apparent with the economic contraction and government stimulus measures increasing the global money supply. Bitcoin has positioned itself as a perfect hedge against inflation. Unlike fiat money, bitcoin is not regulated by the central bank. In addition, it has a limited supply of 21 million units. This is different from fiat money which can be printed on a large scale, as is the case in the United States.

The decentralized nature of bitcoin makes it a perfect store of value. Additionally, bitcoin proponents believe the price of virtual currency could rise as investors flee vulnerable conventional financial systems. Therefore, Bitcoin can act as a safe haven for investors.

Bitcoin hedging success

A good inflation hedge is an asset that increases in value over time. Bitcoin has weathered the harsh effects of the Covid-19 pandemic with relative ease. It was trading at around $ 5,000 when the coronavirus was first recognized as a global pandemic. Nonetheless, over the past 52 weeks, bitcoin has risen 235% and many analysts who focus on forecasting Bitcoin prices this year have gone so far as to predict that BTC would hit the $ 100,000 mark again. by the end of the fourth quarter of 2021.

Inflation has increased over the same period, and while, according to Trading Economics data on inflation rates in the United States, inflation was initially only 2.6% in March, it rose rapidly in April with a CPI reaching 4.2%, 5% in May and finally 5.4% in June. . This time, bitcoin was proliferating, responding well to inflation.

Therefore, investors who have turned to bitcoin to hedge against inflation are smiling. We have seen the institutional adoption of cryptocurrency by companies who see huge potential in the growth of bitcoin.

Bitcoin is also an excellent hedge against social disruption and political instability resulting from inflation. For example, runaway inflation leads to increased uncertainty, poverty and a lack of confidence in institutions. Zimbabwe, Argentina and Venezuela are just a few examples. Although these cases are unlikely in developed countries, prevention is better than cure. Remember, Venezuela was once one of the richest countries in the world and look how they are doing now economically. Therefore, using bitcoin as a hedge against instability, faulty payment systems, and government scrutiny is a prudent move.

Usually, raising interest rates is one way to curb inflation. However, many economies today are riddled with debt. Therefore, this movement could have the opposite effect. Therefore, the inflation rate could continue to rise even if interest rates rise.

Fortunately, bitcoin trading is primarily based on the US dollar. Therefore, as the value of the dollar decreases, there is no good reason why the BTC / USD pair should not continue to rise. Additionally, the decentralized nature of the Bitcoin network, and the fact that it runs on technology created by anonymous individuals giving no central point of failure or attack, makes bitcoin a great investment asset. It is not limited to conventional economics.

Bitcoin is quite secure in today’s global environment where old ideas are disappearing and new ideas are taking root. Moreover, with the evolution of politics and the economy, bitcoin is a good hedge against the possibility of a crazy future.

Final words

The global nature and limited supply of bitcoin make it an excellent hedge against inflation. It is not controlled by any government or financial institution. Therefore, it is not subject to economic measures that lead to inflation, such as increasing the supply of currencies through printing. In fact, the proliferation of bitcoin prices as inflation increased during the Covid-19 pandemic is sufficient proof of its enormous potential as a hedge against inflation. Suffice it to say, cryptocurrency has positioned itself as a safe haven for investors with rising inflation.

This is a guest article by Jerry Goddard. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

[ad_2]