Bitcoin is the newest tool in the fight against inflation – here’s why

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A growing number of investors, both institutional and retail, view Bitcoin as a hedge against rising prices – inflation. Inflation is considered a “necessary evil” in any growing economy, including India. Critics argue that Bitcoin may have generated higher returns than other assets like gold or stocks, but it is also more volatile. One of the main arguments in favor of Bitcoin is as “digital gold” – a hedge against rising prices or inflation.

“There are tentative signs that the previous move from gold to bitcoin seen during most of the fourth quarter of 2020 and early 2021 has started to reappear in recent weeks.”

JP Morgan Chase in a note to investors dated October 7

As an example of a price increase, the Central Statistical Office of India reports that the price of milk has increased by 47.3% in the eight years since 2012, even though milk production has increased. increased by 47% over the same period. Supply has increased, but so has the cost.

You can also see the rising prices of goods everywhere else. Economists say much of this is simply because the “purchasing power” of money – like the Indian rupee – declines over time and is tolerated as a necessary evil to fuel the global economy.

However, Bitcoin-denominated prices are believed to be able to push back this trend, thereby helping the currency to hold its value. “Institutional investors appear to be coming back to Bitcoin, perhaps viewing it as a better hedge against inflation than gold,” US investment banking giant JP Morgan Chase said in a note to investors. Everyone is in a race to beat inflation Because inflation encourages spending, it means fiat money in your hand or bank account loses value until it is invested to generate money. yields. In 1973, one US dollar could be exchanged for eight Indian rupees, but the exchange rate in 2021 is almost ten times higher, as shown in the graph below. During the pandemic, one of the main concerns was that even interest on term deposits (FD) was unable to beat the rate of inflation. If the dollar rose against the rupee, in turn, the value of gold rose against the dollar. As the value of the dollar rose against the rupee, the value of gold rose against the dollarStooq / BI India This cycle of inflation explains why a loaf of bread costs so much more today than before. The fall in the value of fiat money determines most investment decisions. You want high returns on your investment to keep up with price inflation, expect income to keep rising until you retire, and so on. When a national currency is used, inflation is inevitable in a growing economy. It helps because the more money there is in the economy, the higher the demand for goods and services. This benefits workers with increasing incomes, but certain profiles of people like students and retirees – those on fixed incomes – are negatively affected. The mythical zero inflation currency

In theory, one way to avoid a continuous rise in prices is to use a currency that “retains” its value, such as the gold standard. It will save you ten rupees for buying the same amount of goods, whether today or ten years later.

However, such a system has proven to be flawed, suppressing economic growth and trade in goods, among other adverse effects. That is why the task of preserving value is now left to assets and investments. Can Bitcoin be a “reserve” currency? There is a limited supply of Bitcoin – partly like gold. Moreover, in recent years the price of Bitcoin has risen faster than other financial instruments, fast enough to hold the value of money, if not more. This has enthusiasts on social media asking if Bitcoin is a preferred investment.

Tracked over a decade, Bitcoin has indeed made profits for those who have held it for a long time. Changes imposed by its built-in protocols, such as “halving”, should also increase its value. So, naming a portion of the wealth in this cryptocurrency could mean gains that offset likely losses in other areas of a person’s investment portfolio.

In fact, large institutional investors and cash-rich companies slowly buy and show it on balance sheets as part of the assets held. In MicroStrategy’s case, even a drop in their primary income turned out to be insignificant, when the increased value of Bitcoin assets swelled their balance sheets by $ 1 billion. Is Bitcoin-ing the World Desirable? Like any early adopter, being at the forefront in purchasing this cryptocurrency could help – until enough people hold Bitcoin as an asset, that it can be used as currency for carry out transactions in goods and services. After that point, people could use it widely for transactions like normal currency, eventually stabilizing its value. For now, however, the dollar value of Bitcoin continues to fluctuate wildly, to the tune of three percent between the morning and evening of the same day. This can be an opportunity or a risk, depending on whether you are selling or buying the currency.

Some titans of the mainstream financial system have insisted that Bitcoin is a fad and that Bitcoin is equated with the 17th century tulip mania bubble.

The existing real conditions could hold lessons for crypto enthusiasts. Japan has had near zero inflation for two decades now – a dream of cryptocurrency enthusiasts – but it hasn’t helped the Japanese much. El Salvador has officially welcomed Bitcoin for daily transactions, but there have been a number of protests against this step.

Some enthusiasts even consider Bitcoin to have deflationary tendencies, in which products can cost less when denominated in Bitcoin terms. This is because such a cycle could continue to reduce prices, wages and production with dire consequences for people. Therefore, most economists today advise avoiding such a path of intentional deflation, although it could still unfold in unexpected and innovative ways with Bitcoin. Best Case for an Anti-Inflation Bitcoin Hedger Those who believed in Bitcoin and stayed put – the HODLers – have managed to achieve extraordinary returns, like computer company MicroStrategy owned by Michael Saylor. Returns on Investments Microstrategy BitcoinMicroStrategy The rise of Bitcoin in recent years suggests that it could be treated as another type of asset for an individual or an institution, used to diversify investments. It could then attempt to offset the unfavorable movements of other asset classes. Here’s how Bitcoin’s value has evolved over the past decade, being well above the rate of inflation against the US dollar and the US stock index BI India If dreams come true, the next decade could see us make purchases on Amazon or order on Zomato by paying in Bitcoins and satoshis (one satoshi corresponds to 0.00000001 of a single Bitcoin). It could be exciting indeed – imagine using a decentralized, global, stable and precise digital currency, highly divisible; hopefully without the drawbacks we discussed earlier.

SEE ALSO: Cryptocurrency Investing 101 – Here’s How to Do Your Own Research (DYOR) and Invest in the Right Digital Asset

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