Bitcoin as a Hedge Against Inflation

In times of need, governments have taken on debt and then printed money. By printing money, two things happen. The value of the currency falls, and as a result of inflation, so is the debt.

Printing money creates inflation. Inflation, in turn, decreases the value of your dollars, be it investments, savings, or just the cash in your wallet. It is in times like this that people look for an asset to reduce the impact of inflation. An asset that is not government nor central bank controlled; an asset that holds its value and has the potential to appreciate in difficult times.

Currency Has Value and Values

Currency has more than just value. It also has values. Currencies such as the USD are founded on the value of centralized control. The federal government backs the dollar, and the Central Bank controls and manages other currencies. The objective is to maintain stable inflation and promote growth.

Since the 2008 monetary crisis, the Federal Bank is independent in name alone. The Fed has been keeping the interest rate low, and they have been printing money, which is being used to finance historically high levels of government stimulus. First, it was bailing out big banks, and now, thanks to the current coronavirus pandemic, to bail out big corporations. As long as the government has the ability, and an incentive, to manipulate the value of the USD, it will do it.

Bitcoin was created in 2008 for these very reasons, and why the value of the cryptocurrency is different from those of fiat currencies. As the supply of Bitcoin is fixed and limited, the value cannot be manipulated by printing more, unlike the dollar. Bitcoin is divorced from an established system, making it attractive at a time when the specter of rapid inflation looms.

Bitcoin Is a Hedge Against Inflation

During periods of high inflation, money is converted into “safe haven” assets, assets that tend to hold their value. Gold is the classic safe-haven asset that has historically been used as a hedge against inflation. This has been the case for thousands of years, and it remains the case today.

Although Bitcoin and other cryptocurrencies are volatile, they are immune to central bank intervention. Cryptocurrencies are decentralized digital assets, not subject to central bank control.

The global value of crypto is $265 billion. Of this, approximately 70 percent is accounted for by Bitcoin. Paul Tudor Jones, one of the most successful investors and fund managers, announced that he was transferring a percentage of his funds’ assets into Bitcoin as a hedge against inflation.

There are valid reasons for Bitcoin being an attractive hedge against inflation.

Purchasing Power:

Satoshi Nakamoto created crypto in response to the flaws in the financial system that were exposed during the 2008 crisis. The supply was fixed at 21 million. As there will never be more than this amount, Bitcoin cannot be devalued by inflation or Central Bank interference in the way the dollar and other currencies are.

Liquidity:

Liquidity matters a great deal in times of crisis. Bankruptcies and job losses are at historic highs, and it does not appear that the situation will get any better for some time. Companies and individuals need to be able to convert assets into a form of money. Fortunately, Bitcoin is a store of value that can be traded around the clock, 365 days a year.

Portability:

Closed borders were, not so long ago, were not even perceived. Today, closed borders are a reality. This introduces the possibility of geographic upheaval, making one’s ability to transfer assets across borders more important than ever before. Bitcoin is the solution. It can be stored on a cellphone or computer and moved with the tap of a screen or the click of a mouse button.

These are but three factors that make Bitcoin an attractive component of a balanced portfolio. At this time in history, the risk of high inflation in the short to medium term looks more likely than it has in recent memory.