Inflation has emerged as among the most important issues in 2021. National currencies are depreciating due to the backdrop of monetary policy, while risky assets are increasing in value. Bitcoin is amongst the assets that have seen strong growth over the previous year. Given the current scenario, Bitcoin price has climbed by 62 percent in the last year, after reaching a historic high of $69,000 in November.   

The notion of inflation may be described by examining two factors- either the currency has increasing supply, or its demand is lowering. Money circulation will be higher in both circumstances, resulting in increased pricing for services and commodities. However, when it comes to national currencies, the central banks are to blame for inflation

However, it's easy to believe that Cryptos protects investors from growing inflation. This is because the largest Cryptos have either fixed their number of coins, or, at the least, have capped their potential circulation growth. Whereas, Central banks work differently. They are free to make as much money as they want. As a result, Crypto is frequently viewed as an inflation hedge, similar to gold, which has a fairly constant supply. Numerous people appreciate Cryptos ability to combat inflation. 

Cryptocurrency, according to trader Paul Tudor Jones, protects against inflation better than gold. JP Morgan and Forbes both agree. Cryptocurrency skeptics frequently accuse it of being volatile, uncontrolled, and/or dangerously speculative, but they also have hardly ever questioned its potential to safeguard against rising inflation.

Is Bitcoin truly deflationary? 

Over the last 12 years, Bitcoin has somehow served as a hedge against inflation but has also surpassed all equities in the S&P 500 index. Bitcoin was created to guard against inflation. We may claim that Cryptocurrencies were created to avoid becoming a victim of inflation, implying that it should be used as a hedge against significant inflationary threats. Because the market is still small, the Crypto price will most likely level off becoming less volatile when large investors arrive. Furthermore, no information is available at this time, and the procedure might take years.  

Bitcoin is seen as a kind of inflation prevention. Why? Because there is a limited supply of it. It's like gold. This is something that many people overlook and many Cryptos have a limitation on their value. Bitcoin has a limit of 21 million coins. As a result, at some point in the future, demand exceeds supply, the price of Bitcoin should climb. Here's where the roadblock comes in. We aren't even close to reaching the limit's conclusion, that will occur around 2140. Is Bitcoin, then, a true deflationary asset? Bitcoin wouldn't be able to operate as a truly reliable hedge for at least another 120 years. Thus, why does it appeal two so many individuals and investors? Furthermore, it doesn't have to be that way. Bitcoin is popular because it strikes a good mix of stability and variability. Many consumers and investors believe that Bitcoin, and Cryptos in general, are a safe haven from inflation at the moment. 

There are two meanings to the word "hedge against inflation". In practice, if inflation rises, the asset should possess the characteristics of an inflation-resistant asset class, the most important of which is a restricted supply. Traditional fiat currencies, after all, are vulnerable because they have an infinite supply, implying that their purchasing power diminishes over time as more units compete for the same amount of products and goods. Bitcoin might be considered as a brand new asset class. But why should the first Crypto be labelled a measure of capital prevention when it is so volatile? Nonetheless, it is convertible that asset price swings will reduce with time. Bitcoin is always termed as "digital gold" because of its potential to operate as a "safe harbor" throughout the event of economic turbulence. Gold got securities (the US and other advanced nations), and hard currencies were once regarded as safe-havens. Although Bitcoin can safeguard an investor against the hazards of asset devaluation in part, it cannot be regarded as a packed gold substitute. Volatility Prevents Bitcoin from getting involved in the listing of protective investments. Nevertheless, Cryptocurrencies will most certainly be able to do so in the future since it blends the characteristics of both gold (which has limited global reserves) and physical currencies (which the owner has complete control over). Bitcoin may be comparable to ancient gold coins in several ways. 

Bitcoins supply is set at 21 million, unlike dollars or any other fiat money, and approximately 18 million have been mined so far, according to Crypto speculators. As a result, any government or central bank is unable to devalue or manipulate it as a result of more money production. Because there is a limited amount of tokens, Bitcoin should theoretically preserve its worth over time. It's also worth noting that the price of Bitcoin is solely determined by supply and demand. 

How to hedge against inflation?

Although inflation is typically thought to be good in a stable and healthy economy, it is frequently undesirable for people to save in cash since currency loses buying power over time. As a result, many market players are investing their hard-earned money in safe investments such as equities, bonds, Cryptocurrency, Bitcoin, and precious metals among other things. Whether you're new, an item that is regarded as a store value should be anticipated to retain its buying power over time, which means it will either stay the same or improve in value. "Hard assets" are assets that keep their hold value over time and are regarded as strong inflation hedges. Hard assets have several key characteristics:

• Scarcity- When there is a severe shortage, prices are likely to rise due to increased demand.
• Accessibility- The item will be valued and accepted by the market.
• Longevity- Assets would likely be in high demand in the future. 

Disclaimer: The author's thoughts and comments are solely for educational reasons and informative purposes only. They do not represent financial, investment, or other advice.