Everything You Need to Know About Bitcoin & Inflation Hedge
Cryptocurrency supporters were of the opinion that bitcoin might be a useful hedge against inflation during periods of economic instability. This argument has been undermined by the sharp decline in the price of bitcoin this year.
Longtime supporters of Bitcoin have stated that the currency’s rarity will shield its value from growing inflation. This is because there is a set quantity of bitcoins, which makes them rare unlike central banks, which may raise the money supply.
These recent observations boil down to one question: is Bitcoin a hedge against inflation or not? Let’s find out the answer to this question, but before that, let’s understand which recent incidents have come to light regarding inflation. Additionally, we will also talk about Bitcoin taxes.
Canceling Student Debt: Inflationary?
There are two ways to approach this question — immediate consumption of goods and gradual consumption of goods.
Case 1
Americans who get their student loan debt forgiven will have more money in their pockets, which they will utilize to purchase additional goods right now.
Result: The initial increase in consumption will significantly raise inflation.
Case 2
Americans who get their student loan debt forgiven will have more money in their pockets, which they will spend more slowly over the span of their lives.
Result: The steady increase in consumption won’t significantly raise inflation.
There is a high probability that the second case is true. That is, canceling student loans will not affect inflation.
War: Inflationary?
Simply put: supply is surpassing demand. Let us take a look at three major instances with respect to immigration labor, goods, and gas prices. The world has changed from:
- Cheap immigrant labor in the U.S. to a world where nativist immigration policies drove wage burdens in the U.S.
- Also, Cheap goods from China to hurting the flow of cheap goods from China
- Cheap Russian gas supported low inflation to supporting high inflation with skyrocketing gas prices in Europe as a result of the Russian war in Ukraine
Bitcoin: A Hedge Against Inflation?
First, perhaps currency depreciation rather than rising prices for products is what causes inflation.
It appears that the market value of bitcoin fluctuates together with Global M2, which measures the total quantity of money in circulation. In other words, when economies enter new money into circulation, the price of bitcoin rises because the new money dilutes the value of the remainder of the money already in use. Thus, this proves that bitcoin is a hedge against currency depreciation.
Bitcoin Taxes in the US
Cryptocurrencies are not considered to be currencies by the IRS, but rather a sort of property. You must pay Bitcoin taxes on the current value of the coin if you accept it as payment. You must pay taxes on the difference between the amount you paid for the cryptocurrency and the sale’s revenues if you sell it for a profit.
However, the specifics of how cryptocurrency taxes are computed depend on your situation. The bottom line is as follows:
- Converting cryptocurrencies into fiat (U.S. dollar, Japanese yen, etc.).
- Any amount over $15,000 for the tax year 2021 when sending bitcoin as a gift.
- Using cryptocurrencies to make purchases of products and services, even little ones like pizza.
- One digital asset is traded or exchanged for another. This includes investing in NFTs with digital currency.
Note: It’s important to keep in mind that you only pay taxes on capital gains from these occurrences, not the full value of the sold assets. This is determined as the difference between the cost basis and fair market value.
Bottom Line
Cryptocurrencies like bitcoin have not shown to be a trustworthy, long-term store of value, although they may yet become more widely accepted and less volatile with time. We will have a clearer sense of how volatility reacts to macro events, such as the rate of inflation, once the fluctuation has smoothed out.
In either case, investing in cryptocurrency is still quite risky. Experts advise only investing with money you’re willing to lose. Additionally, consider investing in cryptocurrencies as a long-term plan and persist with it, even when the economy is unstable.
Cryptocurrency may develop into a more established asset that serves as an inflation hedge. But until we have a better understanding of its track record, we simply cannot say.
FAQs
- Can Bitcoin be an inflation hedge?
When inflation arises as a result of monetary growth, Bitcoin performs well as a hedge against price increases.
- Is Bitcoin the best inflation hedge?
Due to its decentralization and independence from a single central bank, bitcoin has the potential to become a good inflation hedge over time. However, as a relatively new asset class, the current fluctuation and speculative activity in the cryptocurrency market have overwhelmed bitcoin’s intrinsic value.
- What happens to Bitcoin if inflation increases?
The trajectory of the American stock market in recent years, which flourishes when the economy is strengthened and tanks when spending drops, such as during periods of high inflation, has been closely paralleled by bitcoin. When inflation reached 40-year highs in December 2021, bitcoin fell.
