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Bitcoin as a Hedge Against Inflation

Bitcoin - Is it a hedge against inflation? 🤔

By @ShtcoinResearch 📘

Bitcoin BTC BTC Crypto Inflation

Part 2/3 👇

1) With ongoing rate hikes, a complicated miasma of macro geopolitical issues & supply chain disruptions, one can forecast that inflation will last into 2023, if not longer. Here we see quantitative tightening as the Fed sheds its balance sheet in drastic fashion.

2) The Federal Reserve, MUST, by mandate, continue to raise rates until inflation is under control. Quantitative easing- printer goes brrrr. Quantitative tightening= printer stops going brrrr.

3) Right, so there is a summary of the gloomy macro-economic outlook in relation to inflation and the results thereof, interwoven in a tapestry of macro geopolitics.

4) So, then, is Bitcoin a hedge against inflation or not How does this relate to the question we ultimately want to know about- is Bitcoin a hedge against inflation?

5) This, of course, is not such a straightforward answer. Many assets have severely under-performed this year, whether it is stocks or bonds, in general it has been a challenge for everyone.

6) Take Meta for example, with the tech giant ranking as the worst performer of the S&P 500 for 2022. The most consistent strategy, proven over time, is to secure one’s wealth with ownership of that which is valuable.

7) In this case, we can look at gold and real estate as historical stores of wealth, however they each come with their own drawbacks that could disqualify them as being the hedges against inflation or stores of wealth that they are touted to be.

8) Gold is expensive to store and protect, typically requiring large & centralized custodians. It is also not suited to serve as a tangible solution to our modern trade system requirements regarding money and credit claims.

9) Basically, the gold sits in a vault somewhere (you’re told) and you still need to depend on the trust of the guarantor of the paper liabilities issued against the gold.

10) Real estate is also regarded as a store of wealth and typically as a hedge against inflation, however it also comes with its own set of drawbacks. Real estate is politically exposed, it is subject to taxation as governments struggle with insolvency.

11) Real estate requires upkeep, isn’t globally fungible, has large transaction costs, low liquidity and can be sensitive to interest rate moves. Then we get to Bitcoin. So called digital gold. Why and how would Bitcoin work as a hedge against inflation?

12)

There are a number of arguments for this case. Admittedly, we have seen the Bitcoin price drop significantly over the last few months whilst inflation has been raging, so the arguments become harder to make.

13) However, bear in mind the extremely short time period that Bitcoin has existed for. This is why I argue that there is a line to be found in the middle here.

14) Taking into consideration that Bitcoin has acted more as a barometer of monetary policy than of inflation, we know that Bitcoin has only been in existence for 13 years. Bitcoin, in that time, is performing just as it has been designed to.

15) Despite recent investors sitting with losses, investors from 5-10 years ago would be sitting on huge gains. With an era of easy monetary policy, Bitcoin rose from dust to 69K, thus making it perhaps the greatest performing asset of all time, due to

its supply and demand.

16) Let’s take a closer look at what that means. Firstly, Bitcoin has a limited supply of 21 million Bitcoin. And there will ever only be 21 million Bitcoins, with 19 million currently in circulation.

17) It has been released on a defined schedule where fewer and fewer Bitcoin enter circulation averaging every four years, a cycle known as halving. This schedule drives the supply & demand of the asset, factors lacking from the US dollar.

18) Bitcoin is novel, scarce and is a digital commodity. Bitcoin has fungibility that spans the globe, limited counterparty risk, has a large and growing liquidity and unit scalability to settle any quantity of value.

19) The technical aspects offer a similar (and possibly better) transactional profile to existing fiat payment exchange systems. BTC is open source with continuous innovation and development, importantly in protocols such as Lightning Network, extending its every day use.

20) Despite the whale manipulation argument, Bitcoin is decentralized, not centralized by large financial institutions. These arguments for the case of Bitcoin have all been heard before, how is this relevant to todays’ situation?

21) If Bitcoin is behaving as a monetary asset policy barometer, how then can it be a hedge against inflation? I would argue that one again has to factor in the relatively young age of Bitcoin, and, rather, forecast its usefulness as a hedge against inflation.

22) If the current crypto trend continues, we will see a massive increase in demand for Bitcoin; and, due to its limited growth in supply, the price increase should outpace the rate of inflation.

23) More pertinent to the question, with the global adoption of cryptocurrencies into the mainstream financial system, and the introduction of further regulations on the crypto industry, I would say that we will see less and less of the volatility that is the norm currently.

24) With these factors coming into play, where much of the world still needs to onboard with crypto, safely, we can assume that a more stable Bitcoin becomes the ultimate hedge against inflation. 🔥

This post is based on this twitter thread.

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