Last week, the highest-valued cryptocurrency, Bitcoin, completed its third block reward halving since its birth. On Monday, Forbes, the commercial media, said that the 21st century bitcoin is like 20th century gold.
Author Roger Huang said in an article titled “Bitcoin Vs Inflation” that as central banks around the world began to focus on zero or even negative interest rates, many people used Bitcoin as a means to hedge inflation, and some billionaires Coins are regarded as digital gold.
In his article, he reviewed the moments of inflation and deflation that have occurred in history to judge the current macroeconomic situation.
In general, inflation is caused by the general decline in the purchasing power of fiat currencies. If the decline in purchasing power reaches a critical inflection point, that is, the decline in the value of fiat currency and the rise in the prices of goods and services occur within a very fast time, it is called hyperinflation.
The causes of inflation include increased money supply, foreign investors selling a particular currency and malicious attacks by investors (as done by Soros). The result is that goods and other necessities become more unbearable for people who depend on wages, because wages are often more fixed. Operating any business that requires original investment will also become more expensive.
Deflation is the opposite. The price of fiat currency for different goods or services decreases as the value increases. There may be many reasons for this situation, both the central bank’s control of the money supply and the enhancement of its innovative ability.
A typical example is technology-driven deflation. For example, as technology innovation integrates greater processing power into smaller chips, the consumer price of computing power drops exponentially. Similarly, rockets sending astronauts to the moon or sequencing the human genome used to cost a million dollars, but today they cost less than a few thousand dollars.
When the inflation rate rises, ordinary citizens usually feel pressure, especially in terms of savings. They were forced to spend more money at the present moment, which is what happened in the United States in the 1970s, when gold was used as a tool to hedge currency devaluation.
In 2020, the new crown epidemic led to large-scale inflationary monetary policy. Theoretically, Bitcoin’s hedging effect is reflected in its deflation and controllable currency supply, and its use as a potential major transaction method in a more digital world economy. The total supply limit of 21 million means that at some point, the supply of Bitcoin will be less than the demand, which means that in terms of value, the price per unit should increase as the supply decreases.
Historically, hyperinflation has occurred in the Weimar Republic, Venezuela, Hungary and Zimbabwe. Another example is the 1970s stagflation period previously mentioned by the United States, which was the result of the Fed ’s comprehensive employment policy. The Fed must raise interest rates to over 20% to strictly control the money supply to control inflation.
Bitcoin’s technical structure is designed to encourage a deflationary attitude and a relatively stable value reserve, thus partially returning to the “gold standard”. In this way, we can see that Bitcoin and similar cryptocurrencies serve as a truly meaningful hedging tool against inflation.
The article emphasizes that hedging inflation is more important than ever. Bitcoin may play such a role in the 21st century, just as gold did in the 20th century.
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