The financial crisis has pushed governments worldwide into taking extreme measures to ensure their economies continue functioning, and inflation rates have skyrocketed. However, inflation could be good news for bitcoin investors despite its adverse effects on the common consumer. In order to better understand why let’s take a closer look at the concept of inflation and examine the value of fiat currencies.
What is Inflation?
Inflation refers to the loss of buying power of a currency over a given period. As a result of inflation, the cost of goods and services increases. It also increases the cost of living as buying the same goods and services becomes more expensive. In the United States, the core Consumer Price Index (CPI) rose 6.8% in 12 months, causing a spontaneous increase in gas prices, food prices, and housing market prices. The high energy cost caused the price of commodities to increase further in 2022, reaching highs of 9.1%
Over-indebtedness is one of the leading causes of high inflation. When a country borrows too much money, its government must run deficits to cover interest payments. These deficits increase the supply of currency and drive up prices. They also distort the economy, pushing prices away from sustainable long-term levels.
Many economists believe that fiscal responsibility is essential to maintaining a healthy economy. A major reason behind the 2008 global financial crisis was banks lending out money they didn’t have, leading to government bailouts and increasing public debt.
The Money Value and Supply
The road to inflation might have started when President Richard Nixon took the United States dollar off the gold standard in 1971. After President Nixon’s act, Central banks worldwide gained the power to print their own money and alter interest rates almost at will.
The U.S. dollar has declined in purchasing power over the past few decades. With each passing day, the United States Federal Reserve prints $85 billion and puts it into circulation. Financial experts refer to the process as monetary base creation( Monetary Base Creation of printed money + deposits). Deposits are things like checking account balances, savings account balances, etc.
The Fed uses monetary base creation to fund new loans, create jobs, and stimulate economic growth. The Fed injects liquidity into the economy by increasing the money supply and encourages borrowing and investing. Unfortunately, during periods of high inflation, the Fed creates far too much money and ends up flooding the market with cash.
Fixed Bitcoin Supply
The supply of bitcoin is fixed; there can only be 21 million bitcoins worldwide. This fixed supply makes bitcoin a hedge against inflation. In 2020, during the Covid-19 pandemic, central banks lowered interest rates causing a major sign of inflation. As a result, there was a colossal migration of institutions and hedge funds from traditional to current digital assets. They reacted to this by buying big on Bitcoin and other cryptocurrencies.
As a result, Bitcoin gained a lot of value. BTC hit the highest price of $67,556 per BTC in November 2021 since 2009, when it first went public.
Bitcoin and Gold as Stores of Value Against Inflation
For the longest time, investors have renowned gold as a store of monetary value. Since President Nixon took the United States dollar off the gold standard, the dollar’s value has been decreasing. But for the last decade, bitcoin has not only out-shown gold to counter inflation but has also proven to be a worthy investment overall.
Unlike fiat currency, bitcoin is decentralized. Decentralized means that it is managed peer-to-peer via computers instead of being controlled by one entity. Unlike fiat currency, bitcoin cannot be printed out of thin air. It was created using a process known as mining. Through mining, miners verify transactions made between users on the blockchain network and add new records to the blockchain.
During the 2008 market crash, a $10,000 investment in bitcoin would be worth $5.6 million in early 2022. A $90,000 investment in gold in the same timeframe would be worth $91,000. Gold and bitcoin have fulfilled the end goal of storing monetary value against inflation. Both are better than having money in a savings account; however, bitcoin is more lucrative than gold. Other than that storing value, investors looking into Bitcoin stand a better chance of enjoying massive returns on investment as Bitcoin gains massive adoption and value.
The Future of Inflation and Bitcoin Price Prediction
According to CNBC, the Federal Reserve is anticipated by economists and investors to wrap up inflation. This indicates that a wave of inflation is coming, not only in the United States but also in the entire world economy. Under President Joe Biden’s death bill, the executive order, The Federal Reserve has printed $1.6 trillion out of thin air to act as a payout to American Citizens. The action could increase the money supply and cause a massive increase in inflation figures.
Different agencies differ in predicting the exact value of inflation. It is tough to foresee the exact future value of inflation, and this figure is dependent on external factors like the central banks. Using past data, the inflation rate in the general world inflation rates have been on a steady increase since 2010. If the trend continues, inflation will increase over time and cause the purchasing price of commodities and services to increase.
Why Do Some People Call Bitcoin a Bubble?
Because of its recent surge in value, some economists believe that bitcoin is similar to the dotcom boom of the late 1990s. Others disagree. The concept behind the bubble theory is that something as new as bitcoin would experience extreme volatility. Crypto critics believe that as adoption increases and the value grows, there will come a point when the value begins to decline rapidly.
Why Bitcoin could Counter inflation
Using this data, it is clear that as inflation has been on a steady rise from 2010 to date, the price of bitcoin has been on a steady rise for the long term though it swings over the same amount of time. Bitcoin seems to follow the trend set by inflation figures affected by interest rate numbers developed by the central banks as they continue to print and borrow money.
According to Bloomberg economists and experts, inflation in 2022 is projected to rise by 5.1%. Bitcoin is currently in a recession and has been on the dip for the better part of 2022. The digital asset is set to appreciate as the crypto market resumes its bull run from the all-time lows created during the bear market at the beginning of 2022.
As the staggering inflation rates continue to rise, bitcoin is set to surpass the $100k mark before the end of 2023. If an investor invests today at the current bitcoin price, he is set to get a 5x return on investment by the end of 2023. No bank gives such interest rates. Gold may also not move a lot in 16 months.
When the Federal Reserve and the Central Banks worldwide continue printing money out of thin air, inflation is set to rise. People will have a lot of valueless money. More money is likely to be used to purchase Bitcoin and other cryptocurrencies and could mean a potential increase in the overall price of BTC.
While the idea of inflation is scary, bitcoin offers a way for society to fight against inflation and maintain stability. Because bitcoin is decentralized, it allows monetary policy and economic activity to occur without controlling a single entity. It also supports a low barrier to entry for those seeking financial independence. While many critics say that bitcoin is a bubble, others argue that it represents an alternative form of currency that will ultimately prove to be far less risky than traditional currency.