Inflation has reached its highest level in decades. As commodity prices rise as the result of supply-chain issues, the ongoing pandemic, and rising energy costs, many people wonder if bitcoin inflation works the same way.
Surprisingly, bitcoin price behaves differently than normal currencies or commodities. We’ll explore why bitcoin doesn’t rise in price like other forms of currencies and what that means for folks who invest in bitcoin.
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Why Bitcoin Works Differently
Cryptocurrencies work differently than government-controlled currencies like the U.S. dollar. Governments have ways to manipulate the value of currencies. One way a country can devalue its currency is by releasing large amounts of currency into the market.
Governments can also increase lending rates to control the inflation of products. This can protect the value of a currency.
As Cam Harvey, a professor at Duke University, recently told Bloomberg News, bitcoin is not influenced by the typical money-supply rule.
Another reason that bitcoin is able to avoid inflation is due to the limited release of digital coins. Governments have the ability to pull or release currency. There are no limits on how much currency a government can release, although those steps can lead to inflation.
By comparison, bitcoin has a limited supply of 21 million coins. When you buy crypto, you are purchasing a finite digital commodity. The cryptocurrency is driven by speculative forces that sometimes lead to a bitcoin dip.
Is Bitcoin a Hedge Against Inflation?
Some people buy crypto to hedge against inflation. The idea is to avoid the volatility that currency and commodities often experience. Purchasing crypto can also provide safeguards against devalued currency.
If someone believes that their currency is at risk of rapid devaluation, they may invest in crypto to protect their assets. It is easy to sell bitcoin for another form of currency.
Many business insiders are finding that bitcoin isn’t the stable hedge against inflation they thought it to be.
The Outlook for Inflation
Inflation remains a big concern for investors. The 2020 economic crisis led the U.S. government to print large amounts of money. Stimulus spending led to massively increased spending by the U.S. government.
2020 was a big year for bitcoin. The value went up 250% that year. If inflation continues to cause concerns for investors, many of them may turn to cryptocurrencies like bitcoin.
The federal reserve is already considering raising lending interest to slow inflation. Bitcoin will continue to be primarily driven by speculators who buy and trade the cryptocurrency for profit.
Learn More About Bitcoin Inflation
Unlike commodities and currencies, bitcoin inflation is not a significant factor when it comes to explaining why the value of the cryptocurrency rises and falls. When bitcoin’s price rises or falls, it’s usually due to buyers and sellers.
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