Is inflation transitory? Is it here to stay? Questions run through the mind of large investors as the massive Covid spendings seem to have exposed the long-term issues the American government has since battled with. For those not familiar with the effect of inflation, a quick summary is that the purchasing power of the dollar would be lesser.
To safeguard themselves against inflation, investors always look to a store of value for their investment, and the two recent options are Bitcoin and Gold. The US Federal Reserve claims they would start tapering and this has renewed interest in Bitcoin as an investment means.
Large Bitcoin holders, also called whales, a term used to describe investors with over 1,000 bitcoins, have been aggressively buying Bitcoin, with over 142,000 bitcoins snapped in the early days of November. The crypto market has seen lots of volatility this year, with an almost 50% correction mid-year. From China’s crypto mining ban to Elon Musk’s bitcoin gamble, the long consolidation, meme coins, and NFT mania before its iconic run back to a $3 Trillion valuation. It seemed like a decade was compressed into one year. Perhaps, one of the greatest positives we can take from the year is the acceptance of a bitcoin Futures ETF by the Securities and Exchange Commission. We may be pained that the Van Eck’s Spot ETF was not accepted, but we cannot deny the fact that the bitcoin Futures ETF is a positive sign from now on. With this, traditional investors can hedge against inflation using the ETF without being exposed to the storage and security fears of buying Bitcoin on trading platforms like redot.com and OKEx. The $10 question is ‘Can bitcoin really hedge against the dollar?’ let’s see
Believed use case of Bitcoin and its criticisms
Bitcoin has come under heavy criticism as a store of value because, unlike Ethereum, Solana, and some other digital tokens in the crypto market, bitcoin does not have an inherent value. While this is quite true, we should not get ahead of ourselves and understand that when it comes to currencies and value, perceived value is true value. So the dollar does not have an inherent value, but because it has been believed to be the world’s currency, it is deemed valuable.
Bitcoin solves some problems which make it very relevant. And unlike the dollar or any other currency that can be printed more, bitcoin inflation is more a myth than a real occurrence.
Much more than for anything, the ability to send bitcoin across borders without restraint or huge processing fees accounts for its greatest use. Also, different countries have legislated laws limiting the amount of fiat currency you can send per time. Bitcoin does not have any daily limit, so you won’t have your account frozen by a financial institution.
Bitcoin might not get to the moon, and it most likely won’t replace our traditional means of finance. Still, we cannot deny it will take the position of gold as the next shiny dirt, as described by Kiana Danial in her book “Cryptocurrency Investing for Dummies.”.
Having an alternative means of hedging inflation is good for our economy. Although Bitcoin has been criticized for consuming much energy and contributing to global warming, this is a blessing in disguise as governments can provide alternative means of energy and get paid back via taxes. This is why many believe China missed out on a huge opportunity after it decided to ban crypto mining.
Can bitcoin guard against inflation?
There are a few characteristics an asset needs to exhibit before it can be seen as a good store of value. In times past, commodities and precious metals were used to store value, but their weighty nature makes them unfit for transfer in our modern-day. Scarcity, divisibility, utility, transportability, durability, and counterfeitability are the six pillars that make a store of value really valuable. Remember the gold standard? When gold was the “happening thing” against the dollar, gold had all these features, and it was deemed valuable. Now, we might just be entering the era of ‘bitcoin standard’ as bitcoins 21 million total value, divisibility into satoshis, utility in cross-border payment and with tradability of crypto exchanges like Binance, Redot and other exchanges, its durability in wallets, and its extremely low means of counterfeitability all make it a worthy store of value. In fact, due to bitcoin’s network size, it is impossible for it to be counterfeited via double-spending or 51% attack.
The bitcoin-inflation relationship is one that is bound to pick up steam into the early months of 2022. Although retail investors, those with ample capital, have been increasing lately, it is hard to overlook the presence of bitcoin whales in the whales’ cryptocurrency faction of bitcoin.
What to expect?
The future is bright. The correlation between whales holding the digital currency and its strength is clear, seeing that the declining presence of whales in the first quarter of this year ultimately led to the crash in May. Bitcoin whales are holding on well now, and it doesn’t seem like it will change anytime soon.
Despite this, there are still a lot of expectations from the crypto market leader as web 3.0 rolls out very soon. Bitcoin should be a capital in the future of the internet, and if it surely gets the honors, we should enjoy the innovative side of bitcoin as a fungible asset. Also, bitcoin has largely stayed away from the DeFi space. If it is to remain relevant, it would have to leave its shell and get a space in the defi ecosystem. New protocols are rolling out, and the second-largest cryptocurrency by market cap is also moving from proof-of-work to proof-of-stake to improve its chances against these new tokens. The battle line has been drawn and it won’t sound fair that the first cryptocurrency has been rendered obsolete.
