Can Bitcoin Protect You Against Inflation?

An image of a person losing money from inflation.

You may have heard discussions recently in the news about whether or not we should be expecting inflation to occur in the wake of the coronavirus pandemic. There are a few different reasons why many people expect that we will experience a period of inflation following the pandemic, and some people who follow the financial markets are indicating that inflation is already occurring in many countries. It’s important to understand what inflation is and what causes it, and then learn how to protect yourself as much as possible from being affected by it.

What is Inflation?

Inflation is simply a measure of the rate that prices of goods and services are rising in a given economy. Due to the fact that when inflation occurs, prices for basic necessities go up, it tends to have a negative effect on society. People who are not wealthy and may have already been struggling to pay for basic needs such as food and housing will find it even more difficult to make ends meet as prices rise.

Once inflation takes hold throughout an economy, people and businesses often become concerned about the prospect of further inflation. Essentially, inflation creates an environment where money that you save now is worth less in the future.

What Causes Inflation?

Inflation can be caused by a few different circumstances, including:

  • Increases in production costs. These could be the wages of workers or the price of materials used to make products. In this scenario, the demand for goods remains the same, but the supply decreases because they are more expensive to produce. These added costs of production must be made up in order for the business that is selling them to remain in business, thus the added production costs are placed on the consumer to cover by way of an increase in the price of the goods.
  • An increase in demand for a product or service can also cause inflation. Naturally, when more people want something, those who produce it or offer it as a service often increase the price, figuring that somebody will be willing to pay a higher price.
  • An increase in fiscal spending by government central banks by way of putting more money into the economy. Stimulus bills meant to stimulate the economy cause a sudden increase in available money in the economy which leads people to spend more. This type of policy can also cause governments to lower interest rates, lowering the cost for banks to lend and enabling them to lend money to more people and businesses. With more people and businesses having access to more money, there is a greater demand for goods and services since those that didn’t have money to spend suddenly have some. The increased demand then drives up prices.
  • Hyperinflation, or extreme inflation, can be caused by an increase in the supply of fiat currency that is not accompanied by a rise in production. When there is a lot of cash without any additional products, each of those products can end up costing more.

Printing more money also increases the amount of available cash, making it less scarce and thus less valuable. That’s why, particularly in times when inflation is high and more money is being printed than usual, you may hear investors and others talk about investing in gold as a way to try to protect themselves from any possible decrease in the purchasing power of a fiat currency such as the U.S. dollar.

Gold As A Hedge Against Inflation

The idea behind buying gold is that, since gold is a precious metal with a degree of scarcity, it will hold its value better than paper money by itself, which can be printed whenever the central government that controls it deems it to be necessary. Value is greatly impacted by whether the supply is finite or infinite.

When the cost of things goes up, but the value of your money goes down, you can’t buy as much. So, out of frustration regarding this situation, some people, at least historically, have turned to gold as a potential solution. However, now there is another innovative potential solution to the problems posed by inflation.

Bitcoin As A Hedge Against Inflation

Bitcoin is not only a relatively new innovation that is worth considering as an investment, it has also been considered by many to be a digital hedge against inflation. Like gold, bitcoin also has a scarcity factor due to its limited supply. There can only ever be 21 million bitcoins mined.

Bitcoin has also been considered by many to be a great store of value for this reason, because unlike with fiat currencies, you can’t just print more bitcoin. Many people have even begun to refer to bitcoin as “digital gold” due to its similarities to gold’s use as an inflation hedge and its limited supply. Here’s why this information is important now:

The Relationship Between The Causes Of Inflation And The Coronavirus Pandemic

2020 and 2021 have been difficult for everyone, most notably due to the coronavirus pandemic. Millions of people around the globe lost their jobs as entire cities were shut down in an attempt to slow the spread of the virus. In an effort to provide relief to their citizens during this challenging time, many governments passed expensive stimulus bills.

Although there has been some disagreement as to what inflation due to these measures could look like, and how severe it could be, it is clear that some of the traditional causes of inflation listed earlier have been enacted.

In addition to the passing of stimulus bills around the world, some government central banks have printed money at a pace never seen before. In fact, estimates indicate that almost one-fifth of all U.S. dollars were printed just in 2020 alone. Although these developments do not guarantee that we will experience inflation at the level of hyperinflation, some well-known figures in the world of finance and investments have indicated that they are already seeing signs of inflation occurring.

At the Berkshire Hathaway annual meeting that took place in May 2021, CEO Warren Buffet stated:

“We’re seeing very substantial inflation. We’re raising prices, people are raising prices to us, and it’s being accepted.”

The data supports this claim. Consumer prices increased by 4.2% in April 2021 in comparison to the previous year, the largest increase since September 2008.

Inflation is occurring in countries around the world; even more so than usual due to the pandemic.

What do you plan to do or what have you already done to shield yourself from the negative effects of inflation?

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As always, please reach out to us with questions, comments, and suggestions!

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