It is no secret that the US Federal Reserve has been printing more money lately. In fact, around 40% of all US Dollars in circulation today have been issued during the last 12 months. And after a period of speculation about whether this flow of cash would cause inflation, the market gave its verdict. The price of oil, natural gas and iron has increased by respectively 79%, 60% and 128% in the past year. Copper, wheat, sugar, or soybean also witnessed drastic inflation. And lumber, being the most impacted industry, showed a staggering 266% increase in price. Now, whether this inflation will be controlled or turn into hyperinflation, is the new subject of suppositions.
It can be said that the US economy is too strong to suffer the same fate as Zimbabwe in 2007 and many other countries before it. The US Dollar holds a special position in the world’s economy as many companies around the globe will accept it as a means of payment rather than their local currency. Therefore, to trigger hyperinflation would not only require a lot of irresponsible printing by the US Government but also a slowdown of the global economy.
Unfortunately, these are the exact conditions that the COVID-19 crisis has created. As the world shut down, more money was required to fund stimulus programs and vaccination research. In consequence, a lot of individuals started to believe that this inflation might hit dangerous rates. The famous investor Stan Druckenmiller recently said that it would hit 10% within the next few years, with tragic consequences.
In such times of uncertainty, people start searching for ways to hedge inflation. Traditionally, these have been investing into stocks or real estate, moving into foreign currencies, and buying bank loans or commodities. One famous commodity, also called “hard-assets”, is gold. However, investors started considering Bitcoin as another resource that could provide the same benefits as gold, with all the advantages of a digital asset.
Bitcoin is, in theory, well-positioned to hold its name of “digital gold”. It is safe, in the sense that it cannot be corrupted. In fact, it is impossible to pass off fake bitcoins, and solving the SHA256 puzzle that supports the safety of the network remains a “1 billion dollar” unanswered challenge. It can be stored simply and securely, as it only comes down to keeping a private key, which can be done on a piece of paper or even in one’s own memory. And currently, exchanging Bitcoin for fiat money is really simple. Finally, the main argument in favour of Bitcoin is its predictable limited supply, as the protocol defines the number of coins that will ever exist to 21 million. This might even be an advantage over gold in the long term, as the amount of the metal remaining is uncertain, and companies are exploring the possibility of extracting some from asteroids.
Created in 2009, Bitcoin has only been traded for around a decade. Hence, there is not enough history to predict its future behaviour regarding inflation. It is crucial to add that it might not hold its position as the leading currency in the crypto market. Its current technology evolves slowly, and it, therefore, might never really be used to trade goods and services. Here, its value will only come from speculative interest. Finally, Bitcoin is still volatile. In May 2021, a few tweets and articles were powerful enough to drastically impact its value, crashing from $65000 to $30000. And even if it can be safely predicted that this volatility will diminish over time, this currently undermines its potential use as digital gold.
In short, as the number of dollars in circulation continues to increase rapidly, people are looking for ways to hedge against inflation. However, it might be too soon to use bitcoin as “digital gold”, as it is not yet a stable investment.