When Bitcoin Meets Inflation

Souce: AdobeStock / Jeff

Alice Liu, Senior Associate, Cryptocurrency Investments at exchange-traded fund and exchange-traded product sponsorWisdomTree.

__________

2022 is a challenging year, especially for crypto, as bitcoin (BTC) approaches its correction phase in a halving cycle. The crypto market started the year with price turbulence amid the US Federal Reserve (Fed) raising interest rates, high inflation, and the general equity markets drop.

The total crypto market cap briefly reached an all-time high at USD 3tn in early November 2021 and has dropped to USD 1.87tn, with bitcoin now at around USD 44,000 (-6% year-to-date (YTD)) and ethereum (ETH) at USD around 3,300 (-11%YTD). 

This gives us the opportunity to deconstruct the myth that bitcoin is perceived as an inflation hedge from a technology design standpoint, and how the asset has behaved during the recent high inflationary environment. We then suggest some new ideas on how stablecoins and staking could be used as an alternative solution.

Technologically speaking

The Bitcoin protocol is codified to be deflationary.

New bitcoins are mined using computing power, and the mining rewards are predetermined– the reward halves every four years, hence the new supply of bitcoin halves – making bitcoin’s issuance schedule consistent and predictable.

Currently, over 90% of bitcoins are already in circulation, and the max supply is capped at 21 million. Bitcoin’s inflation rate, calculated as the percentage of new coins issued divided by the current supply, is currently at 1.8% per annum (PA) and is scheduled to decrease after the next halving around March 2024.