Understanding how relationships between currencies and citizens operate can hedge against the risks associated with excessive inflation and increase the chances of profiting from a hyperinflationary situation. Platforms offer numerous trading options and help you start your bitcoin trading journey without dedicated training. Inflation is a threat to many countries in the current political climate. In addition, you may consider knowing whether Should You Invest in Bitcoin This Year.
Fearing the fate of Venezuela or Zimbabwe, governments have taken extreme measures to combat inflation (aka printing money) and preserve economic stability. However, since such efforts can destabilize their economies and high unemployment levels among those that remain employed, they are often unsuccessful or even counterproductive.
Challenges created by inflation:
The current U.S Federal Reserve-led quantitative easing policy seeks to ease the effects of high inflation by increasing the money supply and reducing long-term interest rates; programs such as these are incredibly costly to maintain yet equally ineffective at curbing inflation as they are prompt gifts for any politician who embraces them.
Previous bubbles and busts, from the dot.com bubble of the late 1990s to the recent housing bubble burst of 2008, have shown that excessive spending and over-indebtedness are the catalysts for high inflation, which correspondingly led to the introduction of bitcoin.
The Federal Reserve’s quantitative easing policies created a hyperinflationary environment among both developed and emerging economies, leading to a significant decline in consumer purchasing power worldwide. In response, central banks in numerous countries decided to protect their currencies as an alternative to printing money to alleviate consumers’ rising costs.
As a result of these efforts, gold has been reported by many media outlets as providing “an excellent hedge against inflation. The debate between bitcoin vs gold as the best hedge against inflation is heating up on social media platforms. Let’s find out whether bitcoin or gold is the best hedge against inflation.
The Volatility Of Bitcoin Makes It A Poor Substitute For Gold
Bitcoin, like gold, has a limited and finite supply. Nevertheless, its total amount continues expanding until it reaches a cap of 21 million coins that miners will thoroughly mine out in the coming century. The appeal of bitcoin’s limited supply is that it acts as an automatic inflation hedge; unlike a fiat currency, bitcoin cannot be arbitrarily inflated by central banks to pay for their lavish welfare programs and military misadventures.
While the digital currency has seen a fair share of price fluctuations since its launch in 2009, it has been relatively stable for most of its existence as an asset which can be converted back into fiat currency or goods and services. For this reason, it has been a popular choice for individuals seeking to hedge against the adverse effects of inflation as an alternative investment to gold.
However, as bitcoin’s value rises and its popularity expands, a growing concern is that it could become a victim of its success. As more investors enter bitcoin markets because of its strong performance relative to other economies and assets over the last few years, the digital currency becomes susceptible to significant price fluctuations which can cause immense losses for investors who are not prepared for them.
Concerns about bitcoin’s price volatility have led many investors to look towards gold as a reliable hedge against inflationary environments. Gold is an asset that humans have used as money since the dawn of monetary systems. It is a fungible, uniform and universally accepted currency which is relatively resistant to changes in price and market fluctuations. In addition, gold offers numerous advantages over bitcoin as an investment because of its accessibility, liquidation and reduced threat of default or fraud.
The Prototype Of Bitcoin And Its Contribution To The Inflation Hedge Industry:
An inflation hedge industry was developed in the 1990s by Jack Bernstein. He created an index fund called the Bernstein Dollar Index (BDI) to track the purchasing power of the U.S Dollar as a hedge against inflation. The BDI was created in response to the threat of a costly, hyperinflationary crisis looming over U.S investors in the late 1980s.
Bernstein’s index fund tracked the dollar using a two-tiered methodology which began with the U.S government’s balance of payments and ended with consumer prices. Using this methodology, BDI could track the inflation rate of consumer goods and services as individuals need them throughout their day-to-day lives. This inflation hedge fund inspired the creation of bitcoin’s framework, which was designed to track the purchasing power of fiat currencies in the same manner as BDI.
Bitcoin has accomplished this goal and become a viable alternative to gold thanks to its deflationary model, which incentivizes investors to continue holding onto their coins instead of selling them as they have a limited supply. As more time passes and more bitcoins are mined, that finite supply increases; this phenomenon makes it incredibly hard for bitcoin prices to move significantly downward and just as difficult for them to move upward.
So far, bitcoin seems not as suitable as a hedge against inflation as gold is. Still, it might become a potential contender if the bitcoin community can overcome the volatility issues.
