5 Ways How Bitcoin Can be a Hedge Against Inflation

As of February 2022, the USA recorded a 7.9% increase in its inflation index. In order to prevent this occurrence, governments need to search for other alternatives that can combat their devaluing currency.

The common strategy that countries apply is hedging the fiat currencies against hard assets such as gold. By definition, hard assets are financial instruments that can maintain their value over time. 

Bitcoin, being a hard asset, could gradually become an appropriate hedge against inflation. This article will provide an insight into how Bitcoin can aid in reducing a nation's inflation level.

5 Ways Bitcoin Can Curb Inflation

Bitcoin is currently the leading digital asset with a market cap exceeding $700B. Its ability to function in a decentralized peer-to-peer network is making BTC a favorable financial instrument. 

Asides from that, the digital asset offers several advantages such as security and transparency, which contribute to its popularity. In that regard, Bitcoin could help mitigate inflation in the following ways:

A Fixed Supply

Data shows that Bitcoin has an overall supply of $21M BTCs. Today, 90% of the virtual currency is already available in the market. Its known and limited supply makes BTC an appropriate tool to hedge against inflation.

Simply put, scarce Bitcoins in the market make them more valuable to investors. Thus, an excessive flow of money will translate to the devaluation of a certain currency and a declining purchasing power. 

Bitcoin becomes valuable in the long run because of its fixed supply and deflationary mechanism.

Mainstream Acceptance

Mainstream acceptance of Bitcoin can play a role in limiting a nation's inflationary gap. If the majority adopts the asset, it becomes easier to increase BTC's value overtime. At the same time, Bitcoin may not be a viable option to curb inflation if the community disapproves of its application. 

A lower acceptance rate therefore would lead to a decreasing asset value. However, entities such as banking institutions and asset managers are paving the way for Bitcoin investments. 

As more iconic institutions like Goldman Sachs feature in the crypto scene, Bitcoin will undoubtedly become valuable and provide an adequate hedge against inflation. 

Decentralized Borrowing/Lending

In most cases, countries may resort to raising the interest rates once they register growing inflation. Governments may employ this strategy to make their currency stronger and manage the excess liquidity in the market.

Investing in the decentralized borrowing/lending field can provide better insurance for users who would want to add value to their holdings. 

When investors submit their BTC to a lending platform, the pool generates sufficient yield over a specified period. Hence, leveraging lending protocols can uplift a currency that is decreasing in value.

Decentralization

The absence of governments in the world of digital assets gives Bitcoin a stronger hedge against devaluing currencies. Decentralization refers to a system that is solely guided by the community without any central authority. Governments, through central banks, are responsible for determining the number of currencies they mint and supply in the market.

As mentioned earlier, an immense supply of money can increase a region's inflation level. Bitcoin's decentralization follows a consensus mechanism that involves miners verifying transactions. Thus, releasing the virtual currency in the market only takes place through an algorithmic process void of centralized authorities. 

In essence, minting BTCs occurs when miners add more blocks to the chain. Decentralization is, therefore, an additional factor that may aid in countering inflation.

Strategic Diversification

Investing in Bitcoin using a number of strategies also counts as an effective way to deal with inflation. However, the asset's volatility poses a threat to investors, particularly those with short-term goals. Hodling is the most common long-term strategy that investors use to maximize profits. 

It involves holding BTCs in a digital wallet over an extended period. Dollar-cost averaging (DCA) is yet another strategy investors can employ to generate sustainable BTC incomes. Through DCA, investors can take advantage of bull and bear markets to acquire virtual currency in a progressive manner. 

Futures can also offer returns for investors who look forward to gaining direct access to the crypto market. Under this investment tactic, two parties form an agreement of buying/selling Bitcoin within a specified timeline. 

Moreover, the virtual coin will be acquired or sold at a fixed value once the period arrives. Hedging, therefore, becomes convenient as investors profit from diversified investment approaches.

Bottomline

Without a doubt, the emergence of inflationary momentums has adverse effects on a country's economy. During the event, currencies lose value over time and the purchasing power becomes weaker. As a result, governing bodies have to establish the most suitable hedging mechanism which can manage inflation.

Bitcoin works as a trusted reserve asset that constantly increases in value. The coin's value largely depends on external and internal factors which drive the coin up and down. What's more, BTC has a limited supply compared to regular fiat currencies printed by the government. 

Therefore, the digital coin's scarcity and durability as a long-term reserve asset make it a practical instrument that may counter inflation.