Crypto enthusiasts often talk about bitcoin as a hedge against inflation. Why?
The argument is that central bank money printing will lead to inflation or the decrease in the value of money over time. Bitcoin, by contrast, has a fixed limit of 21 million coins that can ever be created. This limited supply allows bitcoin to resist inflation.
The COVID-19 pandemic presented the ideal conditions to test this theory once countries across the world began injecting trillions of dollars into their economies. Many countries, including the U.S., printed money to meet stimulus requirements for its citizens.
Yesterday, the chairman of the U.S. Federal Reserve, Jerome Powell said the central bank welcomes higher inflation in 2021 as a sign that the economy is picking up again after the pandemic-slump.
Governments hoped an expansionary monetary policy, whereby central banks increased the amount of money available to people, would keep economies moving amid prolonged shutdowns of certain sections of the economy. By June 2020, stimulus action taken by countries had surpassed $10 trillion, according to a McKinsey Global report. U.S. government-spending alone amounted to $6.5 trillion in 2020, up 48% from the previous year.
“There’s a crazy amount of money being printed right now, so the value of money is going down. Assets with limited supply, like bitcoin, real estate or shares/stocks, those price tags are going up,” Oki Matsumoto, CEO of Monex Group told CoinDesk.
It’s true that despite dramatic drops in global economic output and unemployment, market jitters drove asset prices up: the stock market ended the year with record gains. Even bitcoin, considered a fringe asset, had a historic price run, gaining more than 250% by the end of 2020.
And yet, the kind of inflation investors were expecting isn’t here, at least not yet. In fact, U.S. inflation remained stable through 2020. Some economists don’t believe that inflation in America will be running rampant any time soon. Others think a little post-pandemic inflation might even be a good thing.
What is inflation, anyway?
It depends on whom you ask.
The U.S. Federal Reserve defines inflation as the increase in the price of goods and services over time, but many associate it with a change in the money supply, or the total amount of money in circulation.
“In the bitcoin world, they don’t use the term ‘inflation’ quite the way that economists do, as a general increase in consumer price. Instead, they tend to use it to mean an increase in the money supply,” said economist and CoinDesk columnist Frances Coppola.
The crypto argument – that printing more money leads to inflation – does sound compelling, Michael Ashton, inflation consultant and JPMorgan alum, told CoinDesk. When there is a change in the relative quantity of two goods, the one that is…
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