Bitcoin and Inflation Relationship

Recently, we constantly see cryptocurrencies as solutions to escape economic crises. 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? We wanted to tell you about the relationship between Bitcoin and inflation in the first weekend reading of the new year.

In order to better understand the relationship between Bitcoin and inflation, we first need to know exactly what inflation is. Inflation is the increase in the general level of prices; In other words, it is the price of goods and services sold in exchange for nominal money (fiat) in a market. The reason for this is that the fiat currency loses value and the purchasing power of money decreases.

Although there are many reasons why fiat currencies lose value, one of the main reasons is excess supply. Fiat currencies are tied to a central bank and managed by monetary policies. There is technically no obstacle for Central Banks to print as much money as they want. However, the unlimited supply of fiat currencies brings about inflation. As the supply of money increases, the value and purchasing power of money decreases.

Although it is a digital currency and has a very limited usage area, Bitcoin is compared to fiat currencies in every aspect. Increasing awareness and usage areas contribute to the increase in the value of Bitcoin. Bitcoin, which we define as digital money, has not yet been legally defined. There are many people who define Bitcoin as a commodity, currency or security.

Bitcoin is an electronic currency that is not tied to any center and is managed by an algorithm. The algorithm on which Bitcoin depends cannot be intervened from outside. This means that the monetary policies determined when Bitcoin was designed cannot be changed. Bitcoin production does not increase according to demand every year, on the contrary, its production becomes more difficult. Therefore, Bitcoin is not an inflationary currency.

Bitcoin production is subject to certain rules and is designed to produce a total of 21 million Bitcoins. In currencies produced by mining, miners receive the block reward from the solved blocks. Every 210,000 blocks (which is approximately 4 years) the mining reward is halved. In other words, the amount of Bitcoin released to the market decreases every 4 years. Thus, the internal value of money increases as its supply decreases. With this system, after the Bitcoin reward halving every 4 years, the internal value of Bitcoin is free from inflationary effects.

Is Bitcoin in the Bitter Recipe?

The cause of inflation and its solutions are an ancient debate for traditional markets. However, what is noteworthy is that the acceptance rate of financial innovations is very high in regions struggling with high inflation figures or called 'underdeveloped economies'. Underdeveloped economies see cryptocurrencies as a bitter recipe for getting out of the crisis or as a springboard to catch up with global markets.