Bitcoin as an Inflation Hedge

Since the release of Bitcoin (BTC) by the mysterious Satoshi Nakamoto the main attraction to the first digital currency has been the predictable inflation that it is imbued with.  There is a predictable number of bitcoins that are created and the speed at which these are created halves every 4 years until there are a total of 21million bitcoin which will be the end of bitcoin mining.  The previous two times bitcoin was halved, its market value jumped.  When bitcoin was first halved in November 2012, the reward for mining a block on the digital ledger shrank from 50 to 25 coins. The next halving again slashed the reward to 12.5 bitcoin, and the latest May 12th 2020 halving brings the yield to only 6.25 bitcoin per block.  The result of this known monetary supply is that the inflation rate is very predictable. 

In 2011, BTC’s inflation rate was between 30-50% and with the 2012 having from 2011 and 2014 it dropped to 12%.  Again after the second halving, the inflation rate fell to between 4-5%.  This year throughout the month of February, the BTC network’s inflation rate was between 3.59% and 3.86%.  It was expected that the rate would continue to fall with the May 12th having but the rate currently stands at 3.82%.  If the rate continues to fall as expected down to the 1.8% level then this will be lower than the central banks like the Federal Reserve target inflation rate.  In fact, estimates show that BTC’s inflation rate will meander around this 1.8% level until the next halving then likely be 1.1%, and through the year 2025 and in 2026 BTC’s inflation rate will be as low as 0.4%.  Halving numbers 5 and 6 are expected to be in 2028 and 2032.

Today the active supply of BTC is in fact far less than the 18.2 million that have been mined.  Experts believe this because nearly 11 million BTC have not moved in over a year.  It is estimated that between 2.78 and 3.79 million, or between 17 and 23 percent of all bitcoins have been lost.  Older wallets created years ago haven’t spent their BTC in over five years.  That includes wallets believed to belong to Satoshi Nakamoto, who hasn’t touched his estimated 1 million coins since 2011.  The only very unlikely issue is if there is a change in the number of total bitcoin that get produced.

After suffering a slump in February and March of this year, bitcoin now trades for around $9,100 per coin, according to data from CoinDesk, or nearly double its March low.  Past precedent is not the only thing driving up the price of the digital currency.  In its last annual statement on its goals and monetary policy strategy, The Federal Open Market Committee—the Fed’s policy-making body—said: “Inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.  The Committee would be concerned if inflation were running persistently above or below this objective.”

Although central banks worldwide like to tell the public the average inflation reference rate is around 2%, some estimates indicate it could be as high as 10%.  With the current COVID-19 crisis and government printing their fiat currencies like crazy the inflation rate for traditional currencies will likely be on the higher end.

Billionaire Paul Tudor Jones who both called the 1987 crash as well at bet on gold in 2019 agrees, ‘if I am forced to forecast, my bet is it will be bitcoin’ as the best inflation hedge.  Tudor is the founder and CEO of Tudor Investment Group, and further said about BTC in his market outlook titled, The Great Monetary Inflation, “The best profit maximizing strategy is to own the fastest horse.”

Going forward if more big investors like Tudor begin to accept BTC as a true currency then the swings that have been seen in the past will decrease.  BTC and fiat currencies are backed only by an intrinsic value the difference between these two are that one can be manipulated(fiats) and one cannot (BTC).  This leads to BTCs stability for inflation that is guaranteed and national fiat currency that is at the whims of governments. 

Disclaimer:  The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance, and MBA in electronic business. Trehan is Senior VP at Deltec International The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries, and/or employees.