How is Bitcoin a hedge against inflation?

In the 2020 bull market and Bitcoin’s record-breaking price peak of $68,566.83, various inflation theories arose. Among these, the notion that Bitcoin served as a safeguard against inflation gained significant traction. The act of printing extra currency in the fiat monetary system is often linked by Bitcoiners to the malicious actions of central banks, aimed at controlling the masses. 

When a currency’s supply is increased, its value is debased and inflation occurs, leading to a more vulnerable workforce, which central banks can easily maneuver. Everyone can benefit from understanding the correlation between Bitcoin and inflation, regardless of whether or not they agree with this narrative. If you want to invest in bitcoins, you can also invest in the Orchid VPN network.

What are the causes of inflation?

Numerous Modern societies are strong believers in the Modern Monetary Theory (MMT), which implies that mild inflation is great for the economic system. As the money supply expands, so does the worth of currency decline. A tiny inflation rate (2-3%) motivates individuals to spend their money as opposed to saving it. It helps to create job opportunities, improve the economy and boost social advancement on the whole. If a lot of new money is brought into the system too fast, inflation can increase to levels that are beyond control. 

This could result in individuals being angrier towards the government, which may weaken the economic system as well as cause society to be much less stable. In case rates of interest aren’t increased to stop this, this may ultimately result in runaway or hyperinflation. Retail and institutional investors are, under these conditions, caught in an unwinnable scenario. They’ll have to spend much more by way of inflation or even pay more interest on new and flexible loans such as mortgages and credit lines.

Can Bitcoin be considered a safeguard against inflation?

Once Bitcoin hit its all-time high, a lot of people thought it would continue to be a very good hedge against inflation. This was based on the concept that Bitcoin’s intrinsic worth is tied to its total scarcity. Given that raising the quantity of something is going to devalue the present supply, it was thought that Bitcoin’s value couldn’t be decreased simply because its supply can’t be increased as that could devalue the worth of Bitcoin.

Some people have pointed out that Bitcoin might offer a safe haven for people searching for protection against the inflation of the currency. This belief was founded on the perception that Bitcoin’s worth will go up as more individuals find out about it, therefore producing a good trend. This seized momentum, particularly at a period when inflation rates have been going up, reaching a peak of 9.1% in June 2022.

The perception that Bitcoin might be a protection against inflation ended up being bogus, more than in the long run. This particular theory was hindered by many factors. First of all, macroeconomic circumstances modified quicker than hoped, resulting in a decrease in available income for list investors because of excessive inflation. Institutional investors additionally faced growing costs in the supply chain as well as improved salaries, making less cash readily available for buying more risky assets such as Bitcoin.

As soon as prime lending rates began to increase, Bitcoin was faced with another serious hurdle. The Federal Reserve instituted several rate increases between December and March 2022, raising the fees from 0.25% to 4.50%. The trend continued into the end of 2023. Consequently, numerous investors required extra funds to pay off increased interest payments, and that resulted in a decrease in borrowed liquidity. Individuals had been pressured to sell their unsafe assets, such as Bitcoin, to cope with the new interest rates.