As central banks around the world continue to print more money, Bitcoin’s maximum supply remains the same, capped at 21 million coins. These coins are set to be released on a pre-coded schedule where fewer and fewer Bitcoins will come into circulation every four years.
This hard cap of 21 million coins and its pre-coded release schedule is what gives Bitcoin the upper hand against inflation. So why then did Bitcoin crash so hard, while inflation skyrocketed?
In today’s edition of Ask Cryptovantage, we’ll explore whether Bitcoin can still be a hedge against inflation, despite its weak price performance last year.
What is inflation?
The rise in the prices of goods and services throughout the economy over a certain period of time is known as inflation and, subsequently, causes purchasing power to plummet. In other words, over time, each unit of currency will be worth less and less as inflation rises.
Moreover, as people and businesses reduce their spending, rising inflation can cause the economy to contract. As a result, excessive inflation often has a negative impact on the most disadvantaged individuals in society.
Why did Bitcoin fall when inflation went up?
It is safe to say that Bitcoin and inflation are not directly correlated and that there are several reasons why inflation has risen even when the price of Bitcoin has collapsed. After all, high inflation is a complex phenomenon and so is Bitcoin, if you think about it.
Rising energy costs were one of the reasons that caused inflation to rise further in 2022 to 9.1%, a high not seen since 1981. Other reasons include the war in Ukraine, endless money printing by governments around the world, pent-up demand for services we have had to lose during the pandemic, shipping bottlenecks, and product shortages.
A perfect storm with huge economic implications.
Bitcoin meanwhile was finishing its four-year cycle by the end of 2021. And although we often say that history does not repeat itself, but rhymes, this time it repeated itself perfectly. When 2022 arrived, Bitcoin and cryptocurrencies were well on their way to the current bear market and saw prices plummet accordingly.
2022 was also the year of bankruptcy in the world of cryptocurrencies. Terra collapsed in May, followed by the bankruptcies of Celsius, Voyager and Three Arrows Capital. The U.S. government attacked Tornado Cash during the summer months, while the FTX debacle took place in November. We ended the year with the bankruptcy of BlockFi and the ongoing struggles at Genesis and Digital Currency Group.
It is a pure miracle that the price of Bitcoin is as high as it is today!
Is Bitcoin still a hedge against inflation?
The answer will largely depend on who you ask. Critics see Bitcoin only as a speculative asset, while Bitcoin enthusiasts believe Bitcoin is already acting as a hedge against inflation.
Bitcoin proponents have long touted the king of cryptocurrencies as an effective, and sometimes the only, hedge against inflation during times of economic crisis. They argued for years that its scarcity would protect its price during periods of high inflation.
As we have
experienced in recent times, this has not been the case as we have not seen Bitcoin act as the perfect hedge. In contrast, Bitcoin and crypto in general had one of the worst years ever in 2022. Prices have plummeted across the board, while inflation around the world has exploded to levels not seen in more than 40 years. Clearly, Bitcoin was not in a position to be a safe haven for crypto investors.
On a positive note, the fact that Bitcoin didn’t turn out to be a perfect hedge this time around, doesn’t mean it will never do this way in the future. In addition, Bitcoin performed well in early 2023, although other assets are floundering.
The king of cryptocurrencies just needs to keep establishing its fundamentals and becoming more mainstream. When mass adoption and integration matures and reaches that critical point of no return, then Bitcoin has a chance to finally become that stronghold against high inflation.
Until then, we will have to recognize that Bitcoin is still very much subject to the rules of four-year cycles and the rules of bear and bull markets.