Coin Metrics: Bitcoin is a potential tool to hedge against inflation

Coin Metrics: Bitcoin is a potential tool to hedge against inflation

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Bitcoin will not be affected by the uncertainty of monetary policy. One of its core attributes is a predictable supply schedule.

Original title: “Coin Metrics 丨 Why is BTC a tool to hedge against inflation? 》
Written by: Nate Maddrey & Coin Metrics Team
Translation: Li Hanbo

For most of the time that Bitcoin has existed, institutions have generally stayed away from investing in Bitcoin on the grounds that Bitcoin is a risky and speculative asset. However, in the course of 2020, many institutions have begun to recognize Bitcoin. One of the most direct reasons for this change is that Bitcoin can be used as a good hedge against inflation.

For example, in early May, billionaire hedge fund manager Paul Tudor Jones announced that he had more than 1% of his assets in Bitcoin. He explained that he sees it as a tool to hedge against inflation. He said: ” We are witnessing the Great Monetary Inflation-every form of currency is expanding as never before, which has never been seen in developed countries .”

Coin Metrics: Bitcoin is a potential tool to hedge against inflation

In their recent report, “Why Corporate Treasury Bonds May Consider Bitcoin,” Fidelity Digital Assets cited potential inflation as one of the main reasons why companies began to consider holding Bitcoin in corporate bonds. Companies such as MicroStrategy and Square have recently bought Bitcoin and stated that they believe Bitcoin is a protective measure against inflation.

The rapid spread of COVID in early 2020 seems to have changed the macro environment overnight. After the market plummeted in March 2020, global central banks began printing money and launched quantitative easing measures, coupled with active fiscal stimulus, at an unprecedented speed . At the end of March, the United States passed the CARES Act, providing stimulus funds worth about US$2 trillion. Therefore, the U.S. M2 currency stock, as shown in the figure below, in the course of 2020, the U.S. M2 currency stock has grown from approximately US$15 trillion to approximately US$19 trillion, a tremendous increase. After the 2007-2008 financial crisis, from January 2008 to January 2010, the M2 currency stock increased by less than US$1 trillion.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: FRED Economic Data

Quantitative easing and the growth of the M2 money stock may not directly lead to an increase in the inflation rate, because the newly printed currency usually remains in bank reserves . However, coupled with the increasing fiscal deficit caused by the global economic lag, rampant quantitative easing has pushed the Federal Bank to its limit and created conditions that may lead to a sharp rise in inflation.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: Federal Reserve Bank of New York, Microeconomic Data Center

Although the inflation rate is still around 2%, the uncertainty of potential future inflation has increased . In other words, although the current estimate of the expected inflation rate is still fixed at around 2%, the expected difference has widened. This is reflected in the figure below. Data from the Federal Reserve Bank of New York shows that after March 2020, the uncertainty of inflation has increased to more than 3%.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: Federal Reserve Bank of New York, Microeconomic Data Center

This increase in uncertainty is also reflected in the latest monetary policy statement issued by the Federal Reserve in August 2020. Although the Fed’s historical target is an inflation rate of 2%, the updated statement stated that “the target of an inflation rate moderately higher than 2% may be achieved within a period of time”.

In contrast, Bitcoin has not been affected by the uncertainty of monetary policy. One of Bitcoin’s core attributes is its predictable supply schedule . Whenever a new block is mined, a new Bitcoin will be issued as a reward for the miners who successfully mine the block. This is the only way to create a new Bitcoin and it is a key part of the Bitcoin protocol.

Bitcoin’s current block reward is 6.25, which means that every time a block is mined, 6.25 new Bitcoins will be issued. On average, blocks are mined every ten minutes, which usually means about 800-1000 new bitcoins are issued every day. Since the specific mining frequency of new blocks is unpredictable, there will be slight differences every day (the difficulty of Bitcoin is adjusted every two weeks to keep the average block time at about ten minutes), but in the long run, this supply issuance It is certain and predictable .

Importantly, the supply and issuance of Bitcoin is also transparent and auditable . Anyone can run a Bitcoin node and independently verify the circulation of Bitcoin throughout history. The chart below shows the daily issuance of Bitcoin, dating back to 2012, using a 30-day moving average.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: Coin Metrics Network Data Charts

Bitcoin’s circulation is reduced by 50% every 4 years. These halvings are also a core part of the Bitcoin protocol and are predictable in the future. The most recent halving occurred in May 2020, which brought Bitcoin’s annual average inflation rate to below 2%.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: Coin Metrics Network Data Charts

Unlike currencies, the total amount of Bitcoin has a hard cap . The production halving occurs every four years until the supply ceiling of 21 million bitcoins is reached. This means that we can predict the future well and clarify what Bitcoin’s inflation rate will look like in 1, 5, and 10 years.

Coin Metrics: Bitcoin is a potential tool to hedge against inflationSource: Bitcoin- A Novel Economic Insititution

Bitcoin’s predictable and transparent financial policy ultimately makes it a good potential tool for hedging inflation. Although the U.S. dollar and many other currencies face increased uncertainty about inflation expectations in the coming years, Bitcoin’s inflation expectations are predetermined. Due to its regular halving and maximum supply ceiling, Bitcoin’s inflation rate will decrease in the future, while the non-currency inflation rate may increase.