How does bitcoin (BTC) protect against inflation?

The bear market we are currently experiencing has been shaking the convictions (and portfolios) of a large proportion of investors for some time. The latter, in particular, saw bitcoin as an asset of choice for substantial returns on the one hand. On the other hand, bitcoin represents a concrete alternative to potential monetary crises, due to its past performance. This is to forget rather quickly the notion of time horizon and the basic mission of bitcoin: to embody, via its very low inflation, a ideal counter-power to long term on the current broadly inflationary monetary policies, which devalue fiat currencies. As such, if the convictions of these investors remain intact, speculative short-term fluctuations in the price of bitcoin will not defeat the true enduring value of bitcoin, which justifies its fundamental mission. Bitcoin therefore represents a concrete strategy to counter the devaluation of the currency orchestrated by current monetary policies.

What is Inflation?

The definition ” economic Inflation is characterized by an increase in the quantity of money in circulation. It remains necessary if it is controlled: if inflation is too high, it harms the economy, in particular if wages do not follow this inflation. The definition ” popularized » inflation, uncontrolled at the moment, is translated by a loss of purchasing power, and this, for a simple reason: the money supply increases with the printing of money in the form of debt, and mechanically decreases the value of the currency in question. For exemple. One euro in 2020 was equivalent to 1.4 euro in 2000. This inflation literally exploded in 2021 during the covid crisis, reaching heights not reached for 40 years. This increase in inflation paradoxically serves bitcoin, which will become portfolio insurance.

Bitcoin as inflation protection

If we put forward the arguments of the detractors of bitcoin as a hedge against inflation, the arguments of frequent and spectacular falls in the price of bitcoin in a bear market inevitably stand out: why hedge against inflation with an asset that can lose? suddenly 75% of its value?

However, this short-term vision prevents us from taking a step back and realizing the potential of this technological revolution. On the one hand, it is worth considering the rate of mass adoption which has been constantly increasing exponentially for the past 13 years. Indeed, the number of current crypto users (about 300 million) is equivalent to the number of Internet users in 1998, if we compare two major disruptive technologies in a very relevant way. The first property that allows bitcoin to be classified as a hedge against inflation therefore concerns the increase in demand.

Bitcoin as a store of value

On the other hand, as we all know, central banks have issued a huge amount of money, in particular in order to bail out the banks affected by the crises of 2008 (financial crisis) and 2020 (covid crisis) and this, in a completely unlimited way. . Indeed, since 1971 and the end of the Bretton Woods agreements by Richard Nixon in 1971, states have been able to create almost infinite debt.

Bitcoin, on the contrary, represents the opposite of the inflationary policy of central banks. In addition to being a payment network and a complete monetary system, bitcoin is governed by the operation of its protocol analogous to that of gold: it represents a resource limited to 21 million units, and therefore an asset. presenting a certain scarcity of supplythe second naturally crucial element in the properties attributed to a store of value.

Currency inflation of bitcoin since its inception
Monetary inflation bitcoin since its inception

Indeed, bullish and bearish cycles, punctuated by halving cycles (miners’ remuneration is halved every 210,000 blocks, i.e. approximately every 4 years), indicate a programmed scarcity of supply over the long term. term. This controlled bitcoin inflation is immutable.

If we include the proven social utility of bitcoin, its operational efficiency, the development potential linked to its small current share in the global money market, and the valuation since 2009 (price increase of 20% on average per year), the bitcoin will be less and less correlated to the equity market and more considered a real safe haven.

Conclusion

Bitcoin certainly represents a technological promise, which will, among other things, make it possible to include 90% of people who are unbanked, discriminated against or residing in a country whose local currency is disproportionately inflationary. But it essentially has, thanks to the scarcity of its supply and the growing enthusiasm for demand, a potential to become this store of value on a global scale, and a monetary standard, like gold before the end of the Bretton Woods agreements, effectively marking the end of the convertibility of the dollar into gold. Bitcoin, thanks to its protection against inflation, will be an investment alternative (bitcoin is the most profitable asset over its 13 years of existence), and above all a safeguard that will make it possible to regain a certain lost stability. since 1971. Moreover, institutions are not mistaken: they have invested massively in bitcoin, like BlackRock and JP Morgan.

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