Do you ever wonder people that follow crypto why are they also following the US economy and even the US dollar so much, the word inflation comes up all the time but what is inflation and what is this relationship with crypto, we are going to tell you so next time you hear inflation and crypto in the same sentence you’re going to know exactly what’s going on.
Have you ever heard the phrase diversify your portfolio, invest in crypto and never worry about inflation again, or something along those lines? While it sounds like a really hard self-pickup line for crypto newbies there is some truth in it.
we’ve seen major asset management firms already diversify their own portfolios by investing into some version of bitcoin from spot bitcoin to bitcoin based etfs, the og cryptocurrency has been on a roll and when covert hit and led to reduced interest rates and extensive borrowing there were signs of major inflation incoming several investors already secured their capital by buying big and buying bitcoin and other crypto
The question that comes up though is why are people suddenly so fascinated with bitcoin, inflation isn’t new in fact the inflation chart has only gone up since 1970. bitcoin was introduced back in 2009 and investors are talking about using it to protect themselves from inflation only last year 2021,
So the big question is why now?
let’s take a look at the last two years, the year 2021 was tough for businesses and so much more but there was really one common thread throughout all of this, the perceived lack of support from governments and also central authorities, people slowly lost faith in their governments and the government’s promises and because bitcoin and most of the cryptocurrencies are decentralized they found a new haven for their finances in this growing asset class and the nature of this asset class and the movement behind it was one of the most common factors behind this migration from traditional assets into cryptocurrency, but there’s so much more so let’s dive in.
Why are people investing in crypto?
probably one of the biggest talking points from the covered pandemic people actually realizing that the government and especially central banks have the power to print as many notes as necessary, there is frustration the central banks can actually raise a lower interest rate whenever they feel like it and print money to balance things out if they go out of balance and that is true to a certain extent but what most people don’t realize though is that even banks have the power, there are several other checks that are in place, there’s no one singular person that can just print more notes printing money has to go through a process if we take the us for example the federal reserve determines how much currency needs to be printed each year and then submits that order to the treasury’s bureau of printing or the BEP this still doesn’t change the fate of someone who saves money in a crisis and just think about it imagine you’ve worked hard all 2020 and 2021 you’ve saved a pretty good amount of money because you’re building reserves in a time of crisis but shortly after you hear about the government printing more money and while that surely shouldn’t affect you right actually it does and we’re going to talk through how
How does printing more money affect you?
if the government prints more money then there’s naturally more currency available in supply than is in demand, for this in return reduces the purchasing power of the currency, so from that what you might only pay ten dollars for at a stake right now actually becomes ten dollars and twenty cents on the other side imagine you’ve already spent a lot more money than usual on items that you need, and if the central bank of your country then decides to take some money out of supply then you’re left with little cash to buy in terms of items because there’s a shortage of cash.
it’s a really complicated scenario and you can tell central banks are constantly reviewing the state of their economy to really decide when the cash needs to be printed, but wait a second when does bitcoin come into all of this?
What is the relationship between crypto and inflation?
bitcoin is actually considered an inflation hedge, you and i don’t control the supply of bitcoin no one does the algorithm or the code is at the heart of bitcoin’s control of supply new bitcoins are generated only as part of mining rewards and the rewards also get hacked every four years you’ll often hear people in the bitcoin space remind everyone 21 million bitcoin only and the value of each bitcoin is also subject to a lot of factors like the number of miners mining rewards even electricity costs of mining, the number of investors buying bitcoin and also what institutional investors want to get in the list of factors is actually pretty extensive and because most of these factors are not in any single individual’s control.
Bitcoin is considered a more trusted asset for investment inflation or no inflation and that’s why you often hear people talking about how bitcoin has now become a digital gold.
in fact for several investors gold is no longer as lucrative of an investment as it used to be just a few years ago and here’s why
Bitcoin Vs Gold
let’s go back a little bit and we’re going to go back to 2012. the economy is just recovering from the 2008 financial crisis and you’ve just started noticing the value of your investments stabilized back to pre-crisis levels things seem to be getting back to normal but you still have roughly a hundred thousand dollars worth of capital left to invest, you’ve got two options number one you can invest in gold or you can invest in this new thing called bitcoin you know that you’re guaranteed really good return on investment if you invest in gold after all it’s one of the most reliable asset classes, however this bitcoin thing also looks pretty cool if you invest in it you could make good money or you could lose everything, who knows?
so you decide to take a chance you decide to invest 90 000 in gold because that’s a safe haven investment and because of your risk appetite you invest 10 percent of your overall capital 10 000 into bitcoin then you fast forward 10 years ago to today you wake up from your nightmare and suddenly remember you invested ten thousand dollars in bitcoin, you have no idea how the market has moved in the past years or if you still have access to it you log into your wallet and you realize that your 10k worth of investment has now become 5.6 million dollars, and for gold your 90 000 worth of gold investment has now become 91 000
has gold fulfilled its goal for you? well yes, gold was a safe haven in a time of uncertainty but bitcoin has been very lucrative for you over the same time frame now i know this would have shocked you and the truth is that for several investors this has been the case many people made millions by just investing a hundred dollars in bitcoin in 2012 and gold, gold’s hardly moved at all in fact if you map out the 10-year return chart for gold and bitcoin there’s some pretty surprising results.
now we have to acknowledge no one has a crypto ball if someone asked me 10 years ago what would you choose a riskier asset with a potential 56 000 return in 10-year periods or a safer asset with a potential 2 return over a 10-year period i would be on a beach right now in the maldives, but it does show bitcoin has been a game-changing investment over a longer time frame but before i do there is now a catch to everything that i’ve said above.
The price of Bitcoin and its relationship with other asset classes
While bitcoin’s now being considered a better inflation hedge, we can’t forget the price isn’t independent of what’s going on in the world. All assets including bitcoin and other crypto are connected to each other in some way.
So over the past two years it has really been noted there’s an increasing correlation between the global stock market and also the bitcoin price and this is increasingly visible with the current state of the market which has been erratic to say the least.
the crypto market has been seeing consistent downturns a potential reason could be the federal reserve planning to increase the interest rates of the u.s economy cut lending and stabilize the economy and we honestly think the fed’s decision will have an impact on bitcoin’s price and bitcoin in turn affected the entire crypto market.
the fact of the matter is that as more investors enter the crypto market more complex relations between assets are formed, no asset class functions independently if crypto is emerging as an inflation hedge today then it’s because it’s already being validated by a big scale investor or several who have invested billions of dollars in the industry and they believe so and as for the state of these investors they already have other assets from commodities to securities in their portfolio.
if they were to close their position on one asset and really utilize that capital for crypto then both asset classes would be affected and that’s just one example of connections between various asset classes, but just think about the number of jobs that are now available in the crypto industry several protocols are looking for developers marketers and also just general enthusiasts and all of this will have some impact on the financial structure of the traditional organizations.
if we take a step back the truth is the impact is not really so easily noticeable and this is why there is some confusion around crypto and inflation.
So what we have learned so far we’ve covered some pretty critical things: bitcoin’s becoming a reliable inflation hedge because it’s decentralized. No one controls it apart from the code and that’s why people simply have to put trust in the code and not some centralized entity authority .
Bitcoin could also be seen as a better inflation hedge than gold because of the lucrative returns there’s increasing correlation between the other financial assets and bitcoin. This is really visible in the chart.
Will crypto replace traditional assets as the only inflation hedge in the foreseeable future?
well we don’t know for sure and as the crypto industry has grown several defects have also become visible several protocol hacks within the industry have also deterred some pretty big investors and rightfully so and then there’s always the case of sudden market movements which we all know recently way too well, we never know when a large investor decides to dump their holding and move the market
We will say it one more time bitcoin is volatile but if we just focus on these certain market movements for just a moment you really quickly realize there’s an intrinsic feature of the crypto market and that is the price volatility with bitcoin, no one can control it if i have one million bitcoin and dump it in the market and then the market moves massively because no one central government or bank can offset the price but then if someone buys two million bitcoin shortly after the market can move in a completely different direction.
The people can still move the market and this independent nature of the market is what sets bitcoin apart. In our opinion it’s a better hedge because it really promises true decentralization to an average investor like you and me. That connection that investors today have with digital asset classes is way more ideological than financial.
we hope you learned something new and if you do want to see more just watch one of these videos here and definitely subscribe to here if you want to help us out on the journey of making cryptocurrencies adopted by all all around the world.