The first cryptocurrency may transform how we think about inflation.
Historically, the strongest inflation hedge has been gold. However, a newcomer has emerged. 13 years into its existence as a young asset, Bitcoin (BTC 1.81 percent) has already shown steady longevity and upward price movement. At the time of writing, the price of a bitcoin has increased by more than 13 million percent from its starting point of roughly $0.003 in 2010.
However, it is not the price of bitcoin that makes it a more effective inflation hedge than gold. It is the commitment of Bitcoin to a limited 21 million coin supply. Similar to how gold’s reputation as the primary store of value has traditionally been assumed to be due to its restricted supply, I contend that Bitcoin has more to offer.
Genuinely limited supply
Gold’s supply is not actually limited. Certainly not practically. Imagine a future in which humans visit other planets and engage in mineral and metal mining. The relative scarcity of gold might be completely erased if we find a gold mine inside an asteroid. Only due to our present-day physical and technological constraints is gold rare.
Additionally, it would become financially viable to mine more of the gold that is already under our feet if the price of gold were to rise dramatically over night as a result of market forces. In order to make it more profitable to mine additional gold, gold miners would increase the supply on the market and push the price back down.
Digital gold is not bitcoin
Despite being referred to as “digital gold,” bitcoin’s supply and inflation are very different. The 21 million coins that make up the finite quantity of Bitcoin can never be altered. Contrary to gold, the quantity of bitcoin cannot be increased (or decreased) through technological advancement or space exploration. Price changes won’t cause miners to create more or less bitcoin or put it into circulation.
Instead, a formula that is enforced by the miners powering the network determines how much new bitcoin will enter the system. This demonstrates how the supply of new bitcoin is independent of price changes.
The supply algorithm for bitcoin
Bitcoin’s supply is not controlled by any one person, group, or organization. When the last bitcoin is mined in the year 2140, an algorithm that started in 2009 will stop controlling it. The algorithm is actually quite easy to comprehend.
You should be aware that a single bitcoin block is mined every 10 minutes or so, and the computer that mines the block receives a reward in the form of some bitcoin. The payout in 2009 was 50 bitcoins every block (which meant 50 new bitcoins were brought into circulation roughly every 10 minutes). That reward is reduced by 50% for each 210,000 blocks mined (approximately every four years). In 2012, it increased to 25, then to 12.5 in 2016 and to 6.25 in 2020. This effectively indicates that bitcoin’s rate of inflation is decreasing and will soon hit zero.
Bitcoin in 2022
The inflation rate for bitcoin in 2022 is less than 2% and is falling with each new block. This is below both the USD’s goal inflation rate and the average inflation rate of the gold supply (13 percent in 2021). Bitcoin’s inflation rate is independent of the central bank, government policy, or its price (unlike gold) (like the USD). The production of blocks is the only factor that affects the inflation rate in bitcoin.
Since the rate of inflation for bitcoin consistently and predictably falls over time, investors like me can expect a significant reduction in the number of new bitcoins entering the market over time. The remaining 10% (2.1 million) of all bitcoin will be mined during the following 120 years, leaving more than 90% of the total (18.9 million) already in circulation. The miners who keep the network secure will need to get all of their income from transaction fees once all of the bitcoin has been mined.
The ideal inflation hedge is bitcoin
In the end, I have faith that the timeline for the delivery of bitcoin will go as planned and without interruption. The only thing that could stop it is a global catastrophe, such an asteroid hit or a severe solar storm. The bitcoin network and its supply plan are otherwise as resilient as the internet itself. Bitcoin’s supply schedule is entirely determined by math, as opposed to gold and the US dollar, which are determined by humans and the decisions they make. I have a lot less trouble believing that the math-running computers will keep acting as instructed. Bitcoin is a better inflation hedge than gold against the USD’s ever-increasing supply because of its rigorous supply limitations.