Cryptocurrency is changing the investment landscape. Investors use to turn to precious metals and other commodities to protect their portfolios from value deterioration, namely inflation. With the current global pandemic and the poor handling of it by some governments, many investors are now looking for other stable investments, like gold, to protect their future. Bitcoin and other cryptocurrencies are being looked at by investors as a hedge against deflation.
With the American government printing more money to handle soaring unemployment, the dollar is losing ground, having already lost 5% of its value. It is expected to shed up to 20% of its value in the next few years. Add deflation to the devaluation, and investors are starting to read the writing on the wall. Bitcoin, so far, has retained its value through this whole pandemic, and investors think it could be the hedge they need against the dollar’s inflation.
Inflation And Deflation Drive The Economy
Anyone who works with cryptocurrency is used to the constant market movements. Macro-level trends like inflation and deflation tend to be overlooked when it comes to fiat currency. Inflation happens with the purchasing power of fiat money decreases. The most typical reason for this is an increase of money supply into the economy, such as the issuing of stimulus checks to the American public during the pandemic. Deflation is the opposite, with the purchasing power of fiat currency increasing relative to different goods and services.
Inflation only occurs in fiat currency, and while it gives governments freedom when it comes to the printing of money, it also causes issues when government spending programs spiral out of control. In the 1970s, gold was the hedge against inflation. Once again gold is booming, but it is booming with cryptocurrency, especially Bitcoin, right beside it.
A Limited Supply Of Cryptocurrency Is Good Against Inflation
Most cryptocurrency is built with an inherent limit, meaning they have a limited supply. This limited supply allows the cryptocurrency in question to act as a hedge against the inflation that is affecting fiat currency. Anyone who works with cryptocurrency should remember this little fact when they are thinking about investing and securing their future.
At this time, Bitcoin has a 21 million token limit. That means that at some point there will be less Bitcoin available for purchase and the demand will cause the value of price per unit to go up. Plus, investors are also moving their investments into cryptocurrency because of the limited exposure to government surveillance and their lack of confidence.
Is Cryptocurrency Really A Deflationary Asset?
Not quite yet. The last Bitcoin is not scheduled to be mined until 2140. That means that, while Bitcoin still has a good chance at being a hedge against inflation, it will not be a completely stable hedge for another 120 years. However, that may not matter all that much in the world of cryptocurrency. Bitcoin has become so popular because it is relatively stable and offers variability. While it’s not a replacement for gold, wise investors will come to realize that cryptocurrency should be considered more than just a hedge against inflation.