What is Inflation? Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. [Investopedia]
In 2008, the financial market collapsed i.e stocks, bonds, housing ,market etc. causing a global financial crisis which happened to be the most serious financial crisis after the Great depression in 1929, many hedge funds and banks went insolvent after interest rates skyrocketed. The price of food and commodities increased while people were unable to afford them due to the ripple effect of poverty.
This crisis was what birthed Bitcoin in 2009 by Satoshi Nakamoto, Satoshi Nakamoto is the pseudonym name of the person/group who created Bitcoin. The genesis block (named Coinbase) of the first 50 Bitcoin mined on the Bitcoin blockchain contained a statement which is “Chancellor on brink of second bailout for banks“. These words were taken from The Times newspaper and it indicated the failure of the current financial system all around the world.
WHY BITCOIN?
Satoshi Nakamoto wrote a whitepaper for their bitcoin project and titled it “Bitcoin: A Peer-to-Peer Electronic Cash System” , in this whitepaper, they explained why the world needs a peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. One of the problems to be solved by this is the issue of double spending in the traditional finance institutions.
Also, Bitcoin was created to be a non-risk asset, i.e a safe haven asset. Non Risk-free assets tend to have quite low rates of return because their safety means investors don’t need to be compensated for taking a chance.
HAS BITCOIN SERVED AS AN HEDGE AGAINST INFLATION?
Bitcoin has somehow failed as a non risk-asset and as an hedge against Inflation. Why?
During the COVID 19 pandemic, in a bid to ease the financial crisis caused by the pandemic, the USA printed about 40% of the dollar supply ($3.5 trillion) and since the citizens were restricted at home and needed money to survive. The stimulus was distributed to every individual who qualified for it.
That money went somewhere; which is the financial markets, people bought Bitcoin, stocks, real estate with that money which directly influenced the pump of the Crypto total market cap from $110B in March,2020 to $3T in November, 2021.
However, the price of Bitcoin plummeted from $69k to $20k as soon as the FED realized that the money printed has gradually caused inflation, thereby slowly increasing interest rate from 25bps up to 75bps (0.25%-0.75%) i.e the % you have to pay back for the loan you borrow. The increase in interest rate has discouraged individuals and organizations from borrowing money, this made the cost of production and commodities to increase, also, employment rate reduced.
The S&p 500, Nas100 and some top stocks which include Amazon, Netflix, Facebook (Now META) have also lost up to 30% from the Bitcoin’s high.
The FED is yet to declare a recession but everyone can feel it coming. Will the FED print more money to save the economy or continuing QT (Quantitative tightening)?
In the next months, the FOMC will continue and the FED will have to decide the next steps to take inorder to save the economy.
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