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Should you invest in bitcoin to protect yourself from inflation?

Bitcoin

6 min read

As of this writing, inflation is a big part of the conversation. Everyone is talking about it, whether in the media, in the political space or even in the families who are most affected by this scourge.

The rise in prices affects all sectors. Purchasing power is collapsing. Currencies, the euro in particular, are losing value. What causes inflation? Can bitcoin, one of whose promises is to beat inflation, get us out of this impasse? All the answers in this article.

Galloping inflation since the start of the year

Since the start of the year, several countries have failed to stop inflation. Last June, in the United States, the inflation rate hit a record not seen in 41 years. The country recorded a price increase of 9,1%. As for the euro zone during the same period, the indicators pointed to 8,9%.

The current economic crisis, which has all the hallmarks of a recession, is primarily driven by rising energy, housing, and food prices. The pressure is mounting on American households, which have seen food prices rise by 12,2% in just one year. This is the largest increase since April 1979.

On the European side, the energy crisis is the hardest hit. Gas prices have reached record levels. As winter approaches, Russia has significantly reduced its gas exports to Europe, partly due to sanctions imposed on the country following the war in Ukraine. Thus, being heavily dependent on Russian gas, the continent is paying a heavy price.

The consequences were not long in coming. The European currency is melting like ice. It reached parity with the dollar. Yes, the free-falling euro has reached its levels of more than thirty years ago. At the time of writing, 1 euro is trading at 0.98 US dollars. However, a year ago today, 1 euro was worth 1.18 US dollars.

Source: google finance

Europe more affected than the United States

As we have just seen above, the European economy is suffering enormously from the current crisis. With next winter threatening to be colder than ever, particularly due to rising energy prices, the currency is also losing ground. Le Figaro reports that the year-on-year price increase reached a record 8.9% in July.

If France records an inflation rate hovering around 6%, other European countries are even more affected. This is particularly the case for Estonia, Lithuania and Latvia. These three countries record an inflation rate exceeding 20%.

Why do currencies collapse?

The Covid-19 crisis has triggered a series of reactions from states on both sides of the Atlantic. With the global economy at a standstill, central banks have resorted to printing money. Subsidies in the form of “covid checks” have been distributed across the board to help households and businesses get through the crisis.

But what our very generous politicians and central bankers haven't explained is where this money came from. The answer is quite simple. This money didn't come from nowhere, like manna falling from the sky.

But the era of miracles is over, and it's important to understand that the banks simply printed money out of thin air, hoping to miraculously revive the much-needed consumer spending. To achieve this, they needed to flood the economy with money. And that's precisely what happened: the infamous helicopter money.

Helicopter money ( also called " helicopter money ") is a monetary policy in which a central bank creates money and distributes it directly to economic agents on a one-off basis. The economist Milton Friedman used the expression in 1969 in thought experiments, but it wasn't a concept he developed further.

At first glance, one might think that state subsidies were essential for families. It's real, but it was all fleeting. Many economists, with bitcoin defenders at the forefront, have repeatedly sounded the alarm.

For the latter, flooding the markets with magic money could not remain without consequences on purchasing power. Thus, inflation was inevitable. Time seems to prove them right. Almost all currencies around the world are collapsing, reaching levels of decades ago.

A slowdown in sight?

Faced with galloping inflation, the Federal Reserve (FED), the American central bank had no choice but to raise interest rates. So, it has become much more expensive to borrow. Consequently, the money supply on the market decreases and causes demand for products to plummet, which has the effect, at least theoretically, of the stabilization or even collapse of prices and de facto an increase in purchasing power.

A slight slowdown was detected in July with a slight drop in certain raw materials such as corn, wheat and copper. So everything is not so dark. In a few years things could return to normal, according to a survey by the New York FED. According to the June survey, Americans expect inflation of 3,6% within 3 years.

But these assertions, coming from institutions which promised annual inflation of 2%, should be taken with a grain of salt. Furthermore, if the FED maintains the tightening of its monetary policy, the situation could gradually improve. As for the European Central Bank (ECB), the key rate was raised by 75 points. With this measure, the guardian of the euro hopes to limit the rise in prices.

Will Bitcoin be able to protect against this galloping inflation?

While bitcoin was trading around 68 in November 000, it did not remain unscathed in the face of accelerating inflation. Indeed, the leading cryptocurrency in terms of capitalization has lost more than two thirds of its value. At the time of writing, it is trading around 2021 euros, according to data from CoinmarketCap.

Although inflation does not hit bitcoin per se, the complex economic environment takes a toll on investors' portfolios. Indeed, its price is greatly influenced by several factors, including currently the consequences of the tightening of monetary policy. With a large mass of investors flocking to cash holdings, it is the balances for all financial assets, including bitcoin.

However, over the long term, as you can see from the chart above, bitcoin has proven its ability to retain value. Although it is very volatile in the short term, bitcoin represents a better alternative to fiat currency. But it all depends on the time horizon of each investor.

—>Read the article “ Is Bitcoin a sound money ?”

It should be kept in mind that despite its limited supply, bitcoin is still too young an asset. Compared to traditional finance, its market capitalization represents only a small drop in the ocean. The more it is adopted by the masses, Nakamoto's invention will tend to regain a certain stability.

Regardless, the disinflationary nature of bitcoin makes it a store of value that could compete with gold in the future. Buying at current prices is like making a bet on the future. A future that looks bleak for your savings given the capacity of central banks to repeat the same mistakes.

If Nakamoto 's invention succeeds, Bitcoin holders will certainly be among the few survivors of the economic crisis shaking our economies.

Investing in “safe havens”

Thus, to protect themselves from rampant inflation, some are investing in gold and Bitcoin as safe-haven assets. This is a way to hedge against inflation by investing in assets that appreciate over time.

Buy bitcoin simply on the site Youhodler and generate interest every week.
Read the article to discover the 5 sites to buy gold with bitcoin.

Note: No financial advice is given in this or any other article on this blog. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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