Bitcoin as the Cause of Inflation or its Hedge

There is no doubt that the BTC token price greatly benefited from periods when the government of the US, like so many other nations, began printing money and pushing it out to its population. These fiscal stimulus projects took place during the height of the coronavirus pandemic. The US in particular led the way in this process, providing its residents and the industry as a whole with freshly minted new money. The monetary supply of the nation ballooned over the 21st century and the last two years placed the same process into overdrive. A lot of that excess money went into a range of digital assets, including BTC tokens as their main representative. 

However, the turbulence that came afterward, including the energy crisis and the war in Ukraine, made all of these financial systems highly unstable and open to all manner of major disruptions. In that unstable ecosystem, the price of bitcoin just like all other digital currencies swung and swayed all over the place, resulting finally in a massive collapse of the markets. These took the price of digital currencies down by well over 50 percent cumulative value. Now, as the world reels in the same negative financial space, the question is whether BTC can offer some hedge against inflation, or does its existence actually exacerbate the inflationary problems for the global economy?

CARES Acts

In the US, CARES Acts were one of the main drivers of expanding the economy with fiscal stimuli. These made sure that over 3 trillion USD came into the US economy. When that happened, many financial experts warned that the same process will increase the chance of inflation taking root at some future point. At the same time, many believe, and not just inside of esports communities and social media, that BTC will be able to act as a shield against the CARES-induced inflation. The key reason is the fact that BTC is hard-capped at 21 million coins. With that factor, there is no possibility of printing more money or in this case coins. 

Instead, these are finalized at the ultimately defined number and will not go any sum past it – whenever the maximum number of tokens is mined. In that regard, bitcoin sounds eerily similar to gold as it too is not open to any kind of central authority introduction of more or less value. Instead, it is simply defined by the market supply and demand which BTC does as well, but only at a huge level of volatility. So, in theory, digital currency would serve as the perfect safety measure against the inflation that would surely come in the wake of the CARES acts. The inflation did come. The hedge against it so far has not materialized inside of the cryptosphere.

Fueling Prices

Like so many predicted, inflation did come as there is a lot more money that is going after the roughly same amount of goods and services. This saw the money printing systems stop and the US Federal Reserve trying desperately whatever it can to stop the same inflation from spiraling out of control. That prices will be a lot harder than they first seemed and even now, hikes in rates that are designed to curb that inflation are trying and failing to reverse the trend. 

The hedge in bitcoin not only did not appear to counter that process, but instead, the complete opposite happened. Bitcoin is presently on course to record its worst three months since it began working in 2009. Yet, as the new reality of 2022 is showing, no one was right about anything. That is why it is not possible to blame the crypto networks for not offering a good enough deal for the flight of capital from fiat to digital currencies.

Causes of Inflation

The debate related to the underlying root of inflation is still going strong, even as the prices of goods and in particular things like gas are soaring in the US. Naturally, there is very little consent in terms of what are the ultimate drivers of inflation at the present moment. One thing is clear – there is no silver bullet that began it all or that is determining it now in the absolute sense. A multitude of factors is likely playing a varying degree of influence, with some economists listing those as high as 15 different drivers, all of which are active at any given moment. 

These include the major players of the US fiscal stimulus and the war in Ukraine, but other factors as well. The same covers semiconductor factory bottlenecks that created a short supply of these key elements for the global economy, but also, interestingly enough, the crypto markets. These apparently, according to many, also play a substantial role in the inflation crisis. 

Risky Bets

The crypto influence comes from the fact that the fiscal stimulus money created a range of buyers of cryptocurrencies. Many of these, big and small, had little to no experience in that market, which caused them to take instant and very risky bets. Much of that money went into thin air and did not produce any relevant influence that would hinder inflation. Like in the 2008 financial crisis, even when times were clearly getting tough, many people continued to buy cars and homes. These then became in turn drivers of inflation. In the case of crypto, there was a massive influx of the now famous 1,200 USD crypto purchases through Coinbase and Kraken. 

Crypto whales did the same as they cashed in on their crypto holdings, buying luxury cars and similar prestigious goods. So, it would be difficult to say that crypto plays the same role in inflation as the war in Europe does or that the financial crisis is somehow fueled by bitcoin or any other digital currency. However, it seems that bitcoin and other cryptocurrencies managed to wedge themselves into an overly risky system that is now failing. The same process resulted in inflation and chances are it will not change anytime soon.

Source: Coindesk