Bitcoin and Inflation: Is it A Good Inflation Hedge?
In previous posts, we’ve touched on the efficacy of cryptocurrency and how it can potentially benefit many young and seasoned investors in diversifying their portfolios. As it relates to financial wellness, we all want the same thing- to have a secure financial cushion upon retiring and settling into the later stages of our lives. With inflation looming, following the onslaught of COVID-19, many are asking the question: Is cryptocurrency a good inflation hedge? While crypto has demonstrated much potential, there is still much to learn in terms of how inflation impacts its value, which will ultimately dictate how people invest, if at all.
Because your long-term wealth is at stake, these are the kinds of decisions that require patience, diligence, and guidance from professionals. When working with a certified financial planner in Westport, CT (we also help clients all over the nation!), you can take an in-depth look at what’s going on in the market and how your portfolio should complement these changes. Let’s analyze the correlation between inflation and cryptocurrency, and why those investing need to pay close attention.
What Is Bitcoin And How Can It Factor Into My Financial Plan?
When discussing niche topics on this blog, we always emphasize the importance of looking at your finances from a holistic lens. “Financial therapy” sounds much better, as opposed to using other jargon that can ordinarily stress you out when putting together a financial portfolio or financial plan. Financial planning can be centered around your preferences as well as what’s essential for securing you and your family’s interpersonal wealth. Prior planning will give you the power to prepare for situations that would ordinarily be difficult, had you not established a financial foundation with a certified financial planner in Westport, CT. These professionals will serve as a guiding light, and will always keep your best interest in mind when creating these plans.
When it comes to Bitcoin, a variety of us are familiar with the term, but others may not fully understand how it’s executed. Bitcoin is a decentralized digital currency that is not tied to an administrator or central bank. Users can send their funds on a secure peer-to-peer network, without the need for supervision. Each bitcoin functions like a computer file, which is then stored in a “digital wallet” app on your computer or smartphone.
All of the transactions are recorded in a public list known as a blockchain. If you’re confident and want to rally behind the idea of Bitcoin, ensure that you open up the floor for discussion with a financial professional, to learn how to properly introduce this into your portfolio. You can discuss its potential as well as the benefits of other kinds of investments (401ks, life insurance policies, disability insurance, etc).
The Potential Of Bitcoin As An Inflation Hedge
On the subject of Bitcoin and inflation, since it’s looked at as a form of “digital gold”, a plethora of users are turning to its potential in the midst of inflation, and for good reason. Despite inflation reaching 6.2% in the US, Bitcoin reached an all-time high of more than $68,000 per token, based on recent findings. In order to understand how it can reign supreme as an inflation hedge, this will depend on a few factors. One factor to pay close attention to is the limited supply of Bitcoin tokens. There will only be 21 million tokens in circulation.
Based on recent estimates, we will reach this threshold by the year 2140. Since the supply of tokens is limited, in theory, it should retain its value. Typically speaking, gold has been dubbed as the strongest inflation hedge. Its supply remains steady over time and it usually has an inverse relationship with inflation. The past year has shown otherwise, with Bitcoin making the case for its efficacy over gold. With that in mind, there are a few other factors that need to be taken into consideration when making this argument.
Bitcoin isn’t affiliated with a certain currency or economy. It won’t be controlled by smaller companies or stakeholders, either. It’s an international asset that reflects global demand. In these times of inflation, certain investors are keeping an open mind on incurring the risk, in order to offset the decline in existing values of assets. The role of Bitcoin here will work to control many of the economic and political risks within the US stock market.
Another element to keep in mind is the convenience and flexibility of making these funds interchangeable. Unlike gold, Bitcoin is easily transferable and portable. The supply of gold is usually controlled by the US, China, Germany, and other countries in Europe. Conversely, Bitcoin isn't controlled and it's much easier to protect than gold.
Key Takeaways:
Bitcoin’s limited supply makes it a better inflation hedge over other forms of crypto
It’s easily transferable and is not hindered by any constraints
Bitcoin is not tied to a particular currency or economy
The data on bitcoin as an inflation hedge is limited compared to what is available on gold as an inflation hedge. There is some upside, but arguably, the data on gold has more extensive history than that of Bitcoin.
Structuring A Portfolio With Your Certified Financial Planner In Westport, CT
The decision to invest in Crypto to weather the storm of inflation is a personal choice. Its benefits have shown much promise, and you can continue to have these conversations with your designated financial advisor. Contact our team at Armah Financial Services to learn more!