Block chain security consulting firm warp future , said: the global economic crisis, the government will be a lot of printing, then lead to inflation, investors will have their money into stable long-term investment. Historically, this stable investment refers to gold. Precious metals used to be the best way to protect investment portfolios from the deterioration of natural value, but Bitcoin is changing the game. In the current economic crisis, another long-term store of value has joined the ranks-Bitcoin.
The Fed is responding to the soaring unemployment rate in their usual way: by printing money to respond to the crisis. The U.S. dollar has depreciated by 5%, and some predict that this is just the beginning. According to Goldman analysts, the yuan exchange rate will fall by more than 20% in the next few years.
In addition to currency depreciation, investors also face another threat: deflation. With the rapid decline in the value of US dollar assets, and the worst is yet to come, investors see Bitcoin as a tool to hedge against deflation. This is the main reason why Bitcoin can maintain its value despite negative news in other economic sectors.
But are these investors correct? Can cryptocurrencies be used as a hedge against dollar inflation?
Inflation and deflation
For crypto investors who are used to dealing with daily or even hourly market fluctuations, it is sometimes easy to forget the macro trends that drive our economy. Inflation is one of them. Before studying the role of cryptocurrency in fighting inflation, we need to understand what inflation is defined.
In essence, inflation is usually caused by a general decline in the purchasing power of legal tender. Many factors can lead to the loss of purchasing power: foreign investors sell a certain currency in large quantities, or even investors attack a certain currency. However, the most common scenario is that inflation is often the result of an increase in the money supply, such as the Federal Reserve unilaterally creating billions of dollars and issuing checks to millions of Americans.
Deflation is the opposite. In the context of deflation, as the value of legal tender relative to different goods and services increases, the price will fall. Similarly, the reasons for this situation may not be the same, but it is usually due to strictly controlled fiscal policies or technological innovation.
Global pandemics and inflation
The key point of these definitions is that inflation can only be calculated in legal tender. These investments are not based on the market value of tangible assets, but mainly based on confidence in growing gross domestic product (GDP). Since the Bretton Woods Agreement was reached in 1944, the latter has been the basis for the value of the dollar.
With legal tender, the government has a lot of freedom in printing money and controlling inflation. However, when people's confidence in the government is as low as it is now, the government's spending plan may cause inflation to spiral out of control quickly. In the 1970s, as investors viewed gold as a tool to hedge against the rapid inflation of the US dollar, the gold market was once prosperous.
Just like the current situation, the global COVID-19 pandemic has triggered a large-scale inflationary monetary policy and an active expansion of the money supply. At the same time, due to the supply shock caused by the blockade, the prices of some rigidly needed goods such as food continue to rise.
In this environment, it is not surprising that gold prices have risen. After all, the supply of gold on the earth is limited, so its price will not be easily affected by government policies. Some cryptocurrencies are also booming, obviously for the same reason. Therefore, billionaire investors have compared Bitcoin to gold.
Is Bitcoin equivalent to a deflationary asset
Certain forms of cryptocurrency can act as a hedge against inflation for the same reasons as gold because they have limited supply. This is something that many people and even people in the crypto field often forget, but it is very important that many cryptocurrencies, especially Bitcoin, have their inherent limitations.
The limit of 21 million bitcoins means that at a certain moment, the number of bitcoins should be smaller relative to demand, that is, in terms of value, the unit price should increase as supply decreases. In addition, Bitcoin allows investors to limit exposure to government surveillance networks, which means that in this period of low confidence in the government, many people are shifting their investments from the U.S. dollar to cryptocurrencies to avoid inflation and the government. Stupidity.
But it is not completely clear whether Bitcoin is really a deflationary asset. Technically speaking, the supply of Bitcoin is limited, but we are still far from this limit. Many people estimate that Bitcoin was finally mined in 2140. This means that for at least the next 120 years, Bitcoin cannot be used as a completely stable inflation hedge.
Flexibility and stability
Of course, this may not be that important. One of the main driving forces behind the rise of Bitcoin is the combination of relative stability and relative variability it can provide. In this case, investors now see cryptocurrency as a stable hedge against the ever-expanding U.S. dollar. However, if you only consider cryptography as a substitute for gold, you will miss one point-cryptocurrency is far more than a hedging tool.
In this article from the warp future (WarpFuture.com) finishing compiling security consulting firm, please indicate. Qusu Future provides related blockchain security consulting services including main chain security, exchange security, exchange wallet security, DAPP development security, and smart contract development security.