Bitcoin is the world’s most successful cryptocurrency. This famous crypto entered the public eye in 2009. When this happened, it was tagged as an inflation hedge. But what is an inflation hedge?
An inflation hedge is a special type of investment. This type of investment is a means of protection against the decreasing value of a currency. And it’s this loss of value which is impacted by either inflation or other economic factors. An investor will invest in an asset that will maintain its value. Or its value will increase over time. This investment includes a specific time. And this time is set by the trader using specific information.
Now that we know what an inflation hedge is, it’s time to turn back to Bitcoin. As mentioned, Bitcoin was tagged as an inflation hedge. The reason this was done was because of the uncertainty of crypto at the time. And this information allows us to quantify inflation’s role in the world of cryptocurrency. We’ve put together a comprehensive guide to help traders navigate inflation and its impacts.
Inflation is a part of how modern crypto works. This is also why it’s important to know how inflation works. With this knowledge, an investor will be more informed. And this counts when choosing coins to invest in or trade. Before we go any further, we will look at inflation.
Officially, inflation is the increase in the price of goods and services. This happens over a certain period. One of the ways that inflation is monitored is the Consumer Price Index. This index is used as a measurement of the prices of an item or service. These items and services can include:
The prices of cryptocurrencies are not indexed by the CPI. Instead, these coins use supply and demand. When the demand for a coin rises above the supply, there is an increase of that coin’s value. When this same demand is lower, the value goes down. Another aspect to keep in mind is speculation. This is measured through the early infusion of investment. These investors hope the value of their chosen coin will increase. Even if this increase happens in the future.
We advise that all traders keep a close eye on the Consumer Price Index. This Index is influenced by many global factors. We will take a deeper dive into the Consumer Price Index and what it means for all traders.
Bitcoin’s relation with the Consumer Price Index is a complicated one. When the coin came into the market, its ability to work as an inflation hedge was questioned by many. But we have since seen that the relationship isn’t as close as was once believed. In fact, there seems to be an opposite effect in place. When the CPI rises, the value of Bitcoin goes down. And when Bitcoin goes up, the CPI comes down.
This is because of the many different factors that govern the Consumer Price Index. But it also makes for an extremely valuable tool that all traders should keep an eye on. The cost of groceries and fuel have a much greater effect overall on the CPI than any cryptocurrency coins.
But this does also still mean that crypto is powerfully impacted. And for traders, the CPI is eternally useful as a means of tracking the market. And doing so with crypto inflation values in mind.
Inflation does not affect a crypto directly. But inflation’s effect on the general economy does eventually impact crypto. Let’s look at an example of this. When inflation occurs for the US dollar, the demand for Bitcoin increases. This is because investors want to protect their assets as much as they can.
These protections can only go so far. Keep in mind that there is no asset that isn’t affected by inflation. This economic phenomenon will eventually impact crypto assets. Which also includes Bitcoin. The reason it’s important to know this is because of a common misconception about Bitcoin. This misconception is about Bitcoin’s resistance to inflation.
The reason Bitcoin has this reputation is because of how it works. Remember, Bitcoin is subject to a four-year halving event. This event automatically lowers the value of Bitcoin. There is no real way around this. It is just how Bitcoin works. Because of this capped supply, Bitcoin is not infinite. We will see the end of Bitcoin once supply runs out. This will mean that no more coins will be in circulation. It’s also an important distinction between fiat currencies. For example, the US dollar has no limit. The US dollar could theoretically be printed forever.
All cryptocurrencies are subject to inflation. Some are impacted more than others. One of the benefits of crypto is that inflation rates are predictable. But we also control them to some degree. Which is another important difference to keep in mind.
Another aspect to keep in mind is the supply of money. The money supply has categories of M1, M2, and M3.
The M2 category is what is used to estimate the supply growth of money. And it has undergone numerous changes over the years. On top of this, a trader can use this system to assess how the global economy is performing. This is important when calculating predictions based on inflation. Always keep in mind that inflation is a core mechanic when it comes to both increasing and decreasing prices and values.
It’s vital to know which coins have low inflation rates. Investors use this information to save a lot of money. This is because inflation rates vary greatly. 1% inflation is just as common as 10%. This is why it’s always better to aim for lower inflation. With this in mind, these are the best coins for inflation:
Other coins will have much higher inflation. Inflation is not always a bad thing. For example, a small amount of inflation helps to boost the economy and increases spending.
Now that we know some low-inflation coins, we need to look at inflation’s impacts. The easiest way to visualise this is by taking a look at the trends.
Bitcoin remains the best coin for following the trends. Many worried about Bitcoin at the start of 2022. This is because the value of the coin took a steep nosedive in the first quarter of the year. This dip took place because of inflation. And it was a fluctuation that had impacts on the market as a whole. It is also a great example of how crypto inflation works in regard to the same market.
Inflation undergoes different changes. And it affects coins in various ways. This is important to keep in mind when looking at different coins. We will take this concept a step further by looking at how Ethereum inflation works.
The circulating supply is always growing. For instance, Bitcoin has a projected fixed supply of 21 million units. But every four years, this total amount undergoes a halving. The next halving event will take place in 2024. This is always important to keep in mind, as these events impact inflation, too. Although Bitcoin’s inflation rate is between 1.7 - 1.8%, this is liable to change. It’s also why traders keep a close eye on the market and use several analysis tools.
To summarise this, the inflation rate for most well-known coins is low. And many expect they will continue to decrease. But nothing is certain. The digital crypto space is quite a small part of the overall economy. In fact, it currently sits at just over $1 trillion in terms of its market cap. This market cap will undoubtedly grow over time. But it’s also worth keeping in mind that small changes in the coins will have small impacts on inflation.
On the other hand, the Consumer Price Index affects crypto inflation the most. Along with this, policy and monetary inflation can also make a huge difference.
We have taken a long look at inflation and how it affects crypto. We have also discovered that there are many aspects to consider. While inflation does impact the price of crypto, the inverse is not true. Instead, economic inflation factors like the CPI make the biggest difference. But this is important information for a trader to have. With this information, it makes it easier to keep track of the market. Including any trends that have the potential to change the prices of various coins. Trends play a larger role than many traders realise. This is why it’s a good idea to start following trends. Even minor trends are used to make better predictions for the future.
It’s also worth adding the CPI and other inflation aspects to your current and future trading strategies. Keep in mind that inflation will lower purchasing power over time. But it’s also worth noting that many coins will be less affected by inflation in the coming years. With the right data at hand, a well-informed trader will be able to make much stronger predictions. It’s important to monitor fiat currencies and how they affect large-scale inflation across the world.