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Bitcoin as a Hedge Against Inflation?

Bitcoin as a Hedge Against Inflation?

This year we are experiencing one of the highest inflation rates in the last 40 years.

The reason? Different things. We started with a global pandemic that put pressure on the demand for products, combined with problems in the supply chain that put pressure on the supply side of the equation.

Then add the government relief funds that increased liquidity, the Russo-Ukrainian war that affected oil supply and increased prices, and finally, a strong labor market that overheats the economy.

To counter this, the Fed, and probably many national governments, are "tightening" their monetary policies and raising interest rates, which has generated high volatility in the stock markets.

The S&P 500 - one of the most popular market indices - has lost more than 21% this year, and the Nasdaq Composite - which measures the performance of companies, mainly in the tech sector - has lost almost 36%. Crypto has also been affected.

And what does all this have to do with Bitcoin? Good question.

This is the first strong inflation season that Bitcoin has experienced since its inception. Although its price has fallen 68% since the beginning of the year (following the falls in the stock market), it's an asset that, unlike fiat money, may have the ability to fight inflation.

We are at a point in history where Bitcoin can take a much more relevant role in the global monetary ecosystem.

To explain why I will paraphrase Bitcoin Standard a bit, a book about the role Bitcoin could play in the economy and that, if you haven't already, I highly advise you add it to your reading list.

For years, money was backed by gold, a finite resource that controlled inflation, generated strong economies, and encouraged savings.

The passing of years, and the wars that came with them, changed this paradigm. Money is no longer backed by gold but by governments that can print more when necessary.

This additional printing of money, combined with other factors, is what, in many cases, drives inflationary processes. After all, the more an asset is available, the lower its value.

Added to this is the credibility crisis many governments experience, leading their currencies to devalue. Let's remember that the only support that money has now is our confidence in a policy and a government.

Reread what I wrote at the beginning of this post, and you will realize that much of this economic cycle can be attributed to creating more money and the following policies to counteract it.

So far, everything is clear. Money is weakening, and something is needed to give it more strength.

And this is where Bitcoin comes in. It's a finite asset, meaning that no one can mine more after the 21 million bitcoins are mined. It is an immutable asset; units can't be destroyed, and scarcity can't be manipulated.

This hard limit could help reduce the strong inflation that "traditional" money creates. We can draw a parallel with gold and see how they share similar characteristics.

Only unlike gold, Bitcoin is easy to store, exchange and transport. In addition, the property is easily demonstrable and verifiable on the blockchain, which helps increase the credibility of the asset. All this makes it much more efficient than gold as a haven asset.

A robust asset drives wealth and savings and creates environments in which innovation and value creation are encouraged. Weak assets can be made out of thin air, undermining these foundations.

Bitcoin still has challenges to overcome, such as volatility, but one thing is clear, we are at a critical historical point that could change how we interact and give value to money. And Bitcoin could play a fundamental role in this.

To close this post, I'll leave you with a sentence from Bitcoin Standard that summarizes this quite well:

"For something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money on the cheap will destroy the wealth of the savers, and destroy the incentive anyone has to save in this medium."