The global economy and inflation
With the headlines on inflation in both advanced and developing economies which can be attributed to the disruption in supply caused by the pandemic. The rise in inflation means lesser purchasing power for the masses, most of whom have turned to cryptocurrencies as a hedge against inflation. But how effective and why are bitcoin and other cryptocurrencies perceived as a hedge against inflation.
Generally, inflation is caused by an increase in the money supply due to monetary intervention but could also be as a result of increase in demand for certain goods and services . However, this increase in the money supply diminishes the purchasing power and renders personal saving worthless as the prices of goods and services are no longer the same.
This has led people into seeking for ways to preserve their money’s worth, hence
they result in buying valuable assets to protect against the destruction of purchasing power and this is where cryptocurrencies come in because they are perceived as
valuable assets. But the question is why is bitcoin considered valuable and thus a hedge against inflation?
why bitcoin is considered a hedge against inflation
Bitcoin is seen as a hedge against inflation mainly because of its limited supply with
a fixed supply of 21 which is meant to control inflation, but when you buy bitcoin,
you’re not just doing so to hedge inflation. You’re buying bitcoin to hedge all the other negative consequences that may arise from an unstable government such as the forced closure of an individual account or even the police seizing private wealth of a citizen.
Though bitcoin does not come in blocks like gold bars. However, they are a store of value like gold and possess some other similar characteristics as gold such as scarcity, fungibility, proven appreciation, widespread acceptance. But one advantage bitcoin has over gold as a store of value is it’s portability, hence it can be transferred to any location in the world instantaneously with ease and arguably more decentralized.
Also bitcoin isn’t tied to the economy of any nation and it is accessible to anyone who owns a smart device with access to the internet and means of payment, this allows the “unbanked” masses struggling with inflation or corrupt monetary systems the opportunity to abandon traditional fiat currency obstacles within their home countries to embrace bitcoin.
Inflation and economic instability is a common problem for both developed and underdeveloped nations, and the rise in prices of goods and services could lead to an economic crisis if unchecked. However, inflation is predominant in most under developed nations and in this part of the world, people buy and sell bitcoin in Nigeria not just for profit but to hedge against inflation and some experts believe bitcoin’s recent rally in the country is related to the increase in inflation, as bitcoin has often been referred to as “digital gold” because of its potential to be an inflation hedge but also acknowledge its price fluctuations which makes it somewhat risky.
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