Bitcoin is often touted as a hedge against inflation, as it has a fixed supply. This restricted limit gives it an upper hand, but it does not mean that it is inflation-proof. In this article, we will discuss in detail what is the connection between inflation and Bitcoin and what role this cryptocurrency can play in inflation.
What is Inflation?
Inflation generally refers to the increase in the prices of goods and services when a currency loses its value over time. It can be due to various reasons, including increased demand for goods, higher production costs, and even rising expectations of future price increases.
Inflation affects all the products and services, including utilities, automobiles, food, medical care, and housing. However, cryptocurrencies, such as Bitcoin, are well-known for experiencing low inflation rates.
What is the Connection between Bitcoin and Inflation?
The economics of the Bitcoin market are complex, so before getting started, you must know what is Bitcoin and how it works. To understand this, you have to consider various factors, and even a minor oversight in this regard can affect your decisions, leading to costly losses.
Some cryptocurrencies, such as Bitcoin, are especially designed with the aim of resisting inflation or experiencing predictable or low inflation rates. No doubt, this cryptocurrency is affected by inflation, as new coins are continuously being mined. But, if compared with the flat currencies, the annual inflation rate of Bitcoin is hard-coded and cannot be changed or manipulated by the states or governments.
What Role Does Bitcoin Play in Inflation?
By analysing some large investments, you will get to know that cryptocurrency has become increasingly aligned with the general movements of the market. This means that if the market goes up and the price increases, the value of Bitcoin will also rise.
However, when the news of inflation strikes, the people as well as the government will be affected by it. There will be monetary tightening, and various assets, including cryptocurrencies, will see a significant price decline.
Is Bitcoin Deflationary or Inflationary?
Bitcoin is technically an inflationary cryptocurrency. It was designed to mimic the stable inflation rate of valuable assets, such as gold. However, in times of inflation, its mining difficulty increases substantially. As a result, each new coin becomes expensive, making this cryptocurrency deflationary. The overall supply of Bitcoin decreases, the intrinsic value of the currency is ultimately increased, so the purchasing power will go up. Therefore, you can say that Bitcoin is neither inflationary nor deflationary.
What are the Benefits of Bitcoin’s Limited Supply?
The limited supply of Bitcoin is capped at 21 million coins, and this scarcity helps preserve its value over time. That’s why this cryptocurrency is well-known to act as a hedge against inflation.
However, the other currencies have to face devaluation due to the government’s monetary policies and various other economic factors. In contrast, Bitcoin has a minimal influence from these. Therefore, if you are searching for a viable alternative to safeguard your purchasing power, consider investing in Bitcoin. This will benefit you in many ways, helping you survive inflation without any financial stress.
