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The value of Bitcoin has dropped from around $70,000 to below $30,000 as the entire crypto market experienced a downturn. The analysts predict that the crypto asset will continue to experience further dips as the crypto market can yet again witness a “crypto-winter” resulting in a further price drop and stagnation.
Bitcoin however is often attributed as a potential hedge against inflation. Though for years now gold has been considered one of the strongest hedges against inflation. However, in an interesting turn of events, Bitcoin surpassed both the stock market and gold by 2021 for the third year straight.
Institutional investors resorted to Bitcoin as a hedge against inflation during the COVID-19 pandemic, concerned that government spending would lead to inflation.
As Bitcoin reached its ATH in November 2021, the talks around it being a hedge intensified. Other leading projects such as Polygon, Polkadot, Ethereum, and BNB, too experienced an increase in their values.
The picture completely changed in 2022, with El Salvador experiencing the possibility of default as the value of Bitcoin decreased.
The crisis in Ukraine, instability in economies around the globe, and the Terra collapse are some of the factors that triggered the bearish trend in Bitcoin’s value. Inflation in the U.S economy and around the world is one of the most significant influences behind this decrease.
A unique thing in Bitcoin’s structure is that it has a fixed supply of 21 million coins, contrary to other forms of currencies. In this scenario, high demand for it would lead to higher prices, encouraging its use as an inflation hedge.
According to Gavin Brown, a senior lecturer in financial technology at the University of Liverpool, Bitcoin’s limited supply distinguished it from fiat currencies (such as the US dollar), which can be subjected to quantitative easing as banks try to combat global challenges like COVID-19 and the Ukraine-Russia conflict.
There are, however, several other hazards that could detract from Bitcoin’s appeal as an inflation hedge. “The well-documented possible 51 percent attack using a quantum computer, or something similar,” Brown added, “would constitute an existential threat to Bitcoin.”
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Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
