Is bitcoin a good protection against inflation? Opinions on this subject may be divided – cryptocurrency opponents will probably be skeptics. Therefore, in this article I will rely on “dry” data. Based on them, I will analyze whether “digital gold” is worth having in your portfolio – especially in times of high inflation.
Inflation, what exactly?
Before I move on to answering the question from the introduction, it is worth explaining the basic concepts. First, what inflation is. The word is often used colloquially as “an increase in the value of goods and services”, or simply that “everything becomes more expensive”. However, this is an effect, not a cause.
Inflation from Latin inflation literally means “to inflate” or “to inflate”. In the context of money, this refers to its issuance and the increase in the amount of currency on the market. And when supply increases and demand remains at the same level, the value of the asset decreases. To adjust to this reduced value, entrepreneurs must increase prices to obtain similar value for their goods or services at the end of the day.
Unfortunately, in the current financial system based on money printing, fiat currencies (fiat money) dominate. Let’s look at the etymology of the next word – fiduciary comes from Latin fideswhich literally means “faith”. This means that the value of fiat currencies is based on the belief that they have value. Or more precisely, on public trust that the country’s economy will be relatively stable and the government will manage debt well. To put it simply, it won’t print too much money (it won’t generate too many promises) without coverage.
When those in power overdo it and public confidence in the currency falls too much, it may result in, among other things, hyperinflation. This is well illustrated by the situation in Zimbabwe in 2008, where people had to carry bundles of banknotes in wheelbarrows for their daily shopping. At that time, 1 US dollar was valued at 2.6 trillion Zimbabwean dollars. Prices literally doubled overnight. The advantage was that everyone could call themselves a trillionaire. The downside was that the chicken cost several trillion Zimbabwean dollars.
The decline in the value of money is a permanent element of the modern world economy.
In other words, those in power around the world need fiat currencies because they are the fuel that drives the economy in an unhealthy way and allows countries to be maintained beyond their means, generating ever greater public debt. The latter is most often already unpayable in practice, so it is reduced by currency devaluations. The problem is that as a result, those who keep their wealth in fiat are in their pockets – their savings are disappearing, although they themselves are often unaware of it. They still have, for example, PLN 10,000 in their account, but this amount can buy fewer goods each year. and services.
What is bitcoin?
Although I assume that most people know what bitcoin is, it is worth paying attention to its specific features.
BTC was created in 2009 as a response to the economic crisis, which exposed the pathologies of the current banking system. The creator – Satoshi Nakamoto – intended that cryptocurrency is not subject to the control of governments or central banks. This is not the only advantage of the digital currency: unlike traditional currencies, bitcoin has a limited supply – a maximum of 21 million units will appear on the market. This feature makes it resistant to the “printing” phenomenon, which is one of the main factors driving inflation.
In fact, Bitcoin is deflationary, as at the time of writing this article, 19.79 of 21 million BTC have already been issued. And every 4 years, the emission level (and therefore inflation) of bitcoin falls by half. This makes BTC the first asset of its kind in the world, and even gold cannot compare to it. As in the case of fiat currencies, it is not really known how much gold, diamonds or other goods there are on the market or in the Earth’s deposits. For example, when the price of gold increases, it may suddenly become profitable to mine it in a more demanding region, which will lead to an increase in the supply of the metal on the market and a decline in its price. In the case of bitcoin, such a mechanism does not apply.
Bitcoin – a shield against inflation
Both of these factors – a limited supply target and a hedge against governments’ “flexible” issuance policies – make bitcoin a solid shield against inflation.
To fully understand this, it is worth looking at the PLN inflation chart. There are periods when it decreases or increases, but it IS constantly. The last time deflation (“negative inflation”) was recorded in our country was in 2016 (0.6%). This means that every year the value of savings in Polish zloty decreases – only the scale of the “inflation tax” changes.
It is worth noting that the above chart shows year-to-year inflation, and not its impact on the zloty exchange rate or, for example, the value of the shopping basket. This means that where the graph seems to be “flat”, inflation still takes its toll in the form of a reduction in the value of our assets – but to a less noticeable extent (without sudden fluctuations).
Now look at the BTC chart:
Of course, the cryptocurrency rate has bad periods. In the long term, however, it grows. So there are two forces that can affect your portfolio: constant inflation of varying intensity and the long-term price appreciation of bitcoin. The matter seems clear: investing at least part of the capital in BTC is a panacea for the destruction of savings by inflation.
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You feel the writing with your nose
All of the above is consistent with what El Salvador is doing, and perhaps soon the USA, which is planning to implement a Bitcoin Strategic Reserve.
As I mentioned, the entire current system is based on debt. Conscious investors know this, but also… governments. Some of the latter are probably beginning to sense that a new world order, and perhaps even an economic model, is slowly being forged, and they want to prepare for the revolution that is slowly approaching. Hence the massive purchases of gold by China and Poland and… bitcoins by El Salvador.
Yes, this inconspicuous Central American country has been purchasing bitcoins since 2021. He currently holds 6,169 BTC. Taking into account that the average BTC purchase rate by Salvador is approximately PLN 45,000. USD, as of the date of writing this article, the government of this country has made good money on this investment.
El Salvador’s public debt is just over $22 billion. The value of bitcoins held has already exceeded USD 0.5 billion. This is still not enough to completely repay the debt, but in a few decades it may become realistic.
The above debt repayment scenario is even more realistic because the US may start purchasing bitcoins during Donald Trump’s term for the same purpose – repaying public debt in 2-3 decades. This is important because such a step by the White House administration will drive huge demand for BTC and help further increase the value of the cryptocurrency, which should help realize the vision of the Americans, El Salvador, and all bitcoin holders.
Summary
The change in the paradigm of perceiving bitcoin as a worthy security for individuals and institutions is well summarized by the words of Ryan Lee, Chief Analyst at Bitget Research:
Bitcoin’s limited supply of 21 million coins makes it a scarce asset, offering potential protection against inflation and currency devaluation. For countries with unstable fiat currencies or fragile monetary systems, bitcoin can serve as a store of value and increase the diversification of reserves beyond traditional assets such as gold, foreign exchange holdings or government bonds. Moreover, Bitcoin’s global availability and decentralized structure may provide an alternative in situations where geopolitical dynamics limit access to conventional reserve assets.
As institutional acceptance of Bitcoin increases, its liquidity and perceived stability improves, making it increasingly favored as a reserve asset. The earlier adoption of bitcoin by central banks may also indicate innovation and a willingness to adopt modern financial technologies, which can increase a country’s global economic profile.
Bitcoin has many characteristics that make it a potentially effective hedge against inflation, especially over the long term. Its limited supply and partial independence from the traditional financial system are advantages that attract investors in times of economic instability.
Currently observed trends – interest in Bitcoin from countries – may further strengthen BTC’s position. Making it a true safe haven for private and public assets.
