In times of global economic turmoil, governments are printing currencies. This gets us to inflation, and investors are consequently putting their money in long-term, stable investments. During history, this referred to gold, but in today’s financial turmoil, bitcoin was added to the list of long-term stores of value.
There are a number of legitimate explanations for this. The US Federal Reserve has dealt with the turmoil poorly and has reacted to rising unemployment statistics in the same way as always: printing cash. The dollar lost 5 percent of its value, suggesting that this is just the start. According to Goldman reports, the dollars are projected to decline by up to 20 percent in the upcoming years.
Along with this fall in value, there is another threat to traders: deflation. With dollar assets falling fast and the worst yet to arrive, investors are aiming for BTC as protection for deflation. This seems to be the main explanation why BTC has maintained its value amid poor reports in other parts of the financial sector.
But are these investors right? Could cryptos act as a buffer against US dollar inflation?
Inflation and Deflation
For cryptocurrency investors used to deal with marketplace fluctuations on a daily basis, it can often be simple to forgo the macro-level factors that fuel the financial sector. Inflation is one of them, and it is helpful to have a vast definition of the terms prior to checking out the roles of digital coins in winning over it.
Inflation more or less occurs when an overall fall in buying power of fiat money. Lots of stuff can lead to this fall in buying power – foreign investors leaving a specific currency or investors attacking one. Frequently this is a result of a jump in cash supply, just like when the Fed makes billions of dollars and sends it to millions of their citizens in checks.
Deflation is the reverse of that. Prices are decreasing as fiat money rises in value compared to various goods and services. There may be various reasons for this, but it is usually happening with tech advancements and very controlled fiscal politics.
The Pandemic and Inflation
The crucial argument in these concepts is that inflation can happen just in fiat currencies — for instance, they are not dependent on the marketplace value of a tangible commodity but rather on trust in the increasing gross domestic product. Ever since the Bretton Woods Agreement of 1944, the latter was the basis of the value of the US dollar.
A fiat currency allows governments a good degree of freedom when we talk about printing cash, as well as handling inflation. But when people are mistrusting the government, as in these times, those government spending programs can result in inflation spinning out of control. For example, in the 70s, there was a gold boom since investors saw it as a barrier between the fast growth of the dollar.
This is close to what’s going on right now. The coronavirus has resulted in a big inflationary monetary policy and the rapid rise of money supply, while costs in important parts, like food staples, continue to rise thanks to supply shocks triggered by the lockdown.
It’s no wonder in this setting that gold is booming. After all, there’s just a finite supply of gold, so the price of gold can not be influenced that easily by government policies. But, some cryptos are growing in popularity, too — seemingly for the same reason. Billionaire investors are now lined up to compare BTC to gold.
Bitcoin: A Deflationary Commodity
The explanation that certain kinds of cryptos can serve as a buffer against inflation is exactly the same reason that gold does so: there is a restricted supply. This is a thing that is sometimes overlooked by many, including those in the crypto sphere, but it’s good to note that lots of cryptos are designed with an unavoidable cap.
The BTC limit of 21 million was to say that after a certain moment, there should be less BTC than the demand that exists, which would mean that when it comes to value, the cost of one unit needs to go up as the supply goes down. Moreover, since BTC lets investors restrict their exposure to government surveillance networks, now when people are mistrustful of the government, people are stepping away with their investments from the dollars and going into the crypto sphere as not to deal with inflation and the government’s moves. Now we can understand why people are comparing cryptos with gold.
But here is the situation – i’s not totally decided that BTC is really a deflationary instrument, or it still isn’t, better said. Yes, from a technical standpoint, the supply of the currency is restricted, but we are not close to that limit, and the majority of estimates put the mining of the last BTC around 2140. This can mean that digital gold won’t be able to be a totally stable border between inflation for the next 120 years.
Flexibility and stability
Still, one of the main forces behind the rising of BTC was the combo of more-or-less stable aspects and relative variability it lets us have. This will encourage investors to see cryptocurrencies as a stable asset when compared to fiat currencies. Yet, we can’t just say cryptocurrencies are just a replacement for gold – they are more than a hedge.