We have been constantly seeing cryptocurrencies in recipes for exit from economic crises recently. We discuss the contributions of digital currencies to the markets and their advantages over fiat currencies. So how does Bitcoin fight inflation, the nightmare of the markets?
In the first weekend reading of the new year, we wanted to talk about the relationship between Bitcoin and inflation.
In order to better understand the relationship between bitcoin and inflation, we first need to know exactly what inflation is. Increase in the general level of inflation prices; in other words, the price of goods and services sold in exchange for fiat in a market. The reason for this is the depreciation of the fiat currency and the decrease in the purchasing power of the money.
Although there are many reasons for the depreciation of fiat currencies, one of the main reasons is excess supply. Fiat currencies are linked to a central bank and governed by monetary policies. There is no obstacle for central banks to print as much money as they technically want. However, the unlimited supply of fiat currencies brings inflation with it. The value and purchasing power of the money with increasing supply decreases.
Although it is a digital currency and has a very limited usage area, Bitcoin is compared to fiat currencies in all aspects. The increase in awareness and usage areas also contribute to the increase in the value of Bitcoin. Bitcoin, which we define as digital money, has not been legally defined yet. There are many people who define Bitcoin as commodity, currency or security.
Bitcoin is an electronic currency that is decentralized and managed by an algorithm. The algorithm that Bitcoin is connected to cannot be intervened from outside. This means that the monetary policies determined when Bitcoin was designed cannot be changed. Bitcoin production does not increase with demand every year, on the contrary, it becomes more difficult to produce. Therefore, Bitcoin is not an inflationary currency.
Bitcoin production is bound by certain rules and is designed to produce a total of 21 million Bitcoins. In currencies generated by mining, miners receive the block reward from the solved blocks. Every 210,000 blocks (this is equivalent to 4 years) the mining reward is cut by half. In other words, the amount of Bitcoin released every 4 years decreases. Thus, the internal value of the money whose supply decreases increases. With this system, after a Bitcoin reward halving every 4 years, the internal value of Bitcoin is free from inflationary effects.
Is Bitcoin On The Bitter Prescription?
The cause of inflation and its solutions are an ancient topic of discussion for traditional markets. However, what is striking is that the acceptance rate of financial innovations is very high in regions that struggle with high inflation figures or are called "underdeveloped economies". Backward economies see cryptocurrencies as a bitter recipe to exit the crisis or as a springboard to catch up with global markets.