Bitcoin as an Inflation Hedge

Bitcoin has consistently gotten great attention from both media agencies and investors ever since its value increased from around $100 in 2013 to over $1,000 at the beginning of 2014.

One reason for this surge in Bitcoin's price might be major financial institutions becoming more accepting of this cryptocurrency. Goldman Sachs, for instance, recently published an analysis on Bitcoin, where it analyzed the advantages and disadvantages of Bitcoin.


Goldman Sachs has suggested three reasons why Bitcoin is rather similar to gold:

1. Both have a finite supply

Given that Bitcoin is capped at 21 million units, it is more similar to gold than to other currencies, monetary policies, or commodities as there is a limited supply of the currency.

2. Anonymity

The blockchain technology that records transactions is anonymous.

3. Easily transportable

It can be transferred peer-to-peer without having to rely on an intermediary.

On the other hand, some pundits are arguing that Bitcoin can be an inflation hedge because of these seven reasons.

1. Bitcoin has been increasing in price exponentially for the past seven years while gold, on the other hand, is way down from its peak of $1900 an ounce in 2011. In addition, Bitcoin has also increased by more than 200% since 2015 alone, while the precious metal does not even come close.

2. Bitcoin has led to an increase in inflation hedging costs for Amazon and Microsoft (NASDAQ: MSFT). However, their earnings reports suggested that they are still involved in earning bitcoin, which makes them bear risks associated with the volatility of bitcoin until they liquidate the coins into cash.

3. Tether, a USD-pegged cryptocurrency that exchanges use to transact in fiat currency, has been facing continuous accusations of not having enough USD to back it up. This has led to bitcoin prices peaking at $1,293 on Bitfinex, a cryptocurrency exchange that does not accept US customers and is believed to be closely linked with Tether.

4. Risk of volatility in bitcoin and Ethereum could result in a decrease in demand or increase in supply, leading to a change in prices for products and services that are pegged to the USD by companies such as Microsoft, Expedia (NASDAQ: EXPE), Overstock (NASDAQ: OSTK), etc.

5. The inflation hedge against gold has been created because bitcoin has outperformed other currencies as a store of value. It is so far ahead that those who have invested in cryptocurrency have ended up gaining more than gold over the last three years. In 2013, for instance, bitcoin increased by 2900%.

6. Many other cryptocurrencies are also gaining at a price over time, but bitcoin remains the most dominant one by far, with a market cap of more than twice that of its closest competitor.

7. Risk of volatility in bitcoin and Ethereum could result in a decrease in demand or increase in supply, leading to a change in prices for products and services that are pegged to the USD by companies such as Microsoft, Expedia (NASDAQ: EXPE), Overstock (NASDAQ: OSTK), etc.

Will bitcoin lead to inflation in the future as well?

If bitcoin continues to attract demand in the future, it will increase its prices even with high supply. The only way for bitcoins prices to not increase is if demand falls due to an alternative cryptocurrency favoring bitcoin.

Here are two examples of how Bitcoin has affected inflation hedging costs

Microsoft hired blockchain professionals for their corporate affairs department but preferred to keep it under the radar. They started mining bitcoins when their prices were lower than $100 and kept increasing their coins share as prices increased. Currently, they are estimated to own 300,000 coins - even after selling some of them in December 2017 when bitcoin was at $19,000.

Bitcoin was worth $1000 in January 2017. As of August 2018, its price has increased by 1,700% and attracts demand from institutional and retail investors alike. This increase in interest will likely result in additional inflation hedging costs for companies like Microsoft and Amazon (NASDAQ: AMZN).

Conclusion:

The future of cryptocurrency is uncertain and you can read about this further on the bitcoin-evolutionapp.com. Despite its popularity, Bitcoin is still relatively new and it has yet to be understood by the general public and even many businesses. Additionally, it has already led to increased hedging costs for large corporations like Microsoft and Amazon. This makes bitcoin a speculative asset that can affect inflation rates in the future.



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