The meme of Bitcoin as a hedge against inflation and central bank money printing is stupid and perfectly tailored to stick in the brains of financially illiterate bagholders.
First, it seems intuitive that inflation should push Bitcoin up, as everything goes up with inflation.
First, it seems intuitive that inflation should push Bitcoin up, as everything goes up with inflation.
Except Bitcoin isn't bacon or milk, it's a financial construct. Not all assets go up with inflation. Bonds go down with inflation as interest rates rise. Stocks can go down with inflation if input costs exceed the company's pricing power.
Bitcoin's input costs would rise.
Bitcoin's input costs would rise.
Bitcoin costs money to exist - it needs ASICs and electricity, and those will definitely go up with inflation. Of course miners are free to reduce the hash power to counter-balance that, but then the security of the network will decline, so how is that good for the price?
"But gold goes up with inflation" - gold has genuine, inelastic demand; people buy wedding rings if they cost $300 or $600 just the same. One might argue that people buy Bitcoin at $30K or $60K just the same, but that's assuming all their other expenditures aren't going up.
Bitcoin's price is very much correlated with risk assets, as we've seen during the only real test (in March 2020), which means that it's not inelastic. That doesn't bode well for a new normal of inflation-induced trauma.
Then there's the idea that "money will flow into Bitcoin".
Then there's the idea that "money will flow into Bitcoin".
Supposedly people will spend money on anything to protect their savings, which will push Bitcoin up.
I hate to break this up for you, but when inflation hits, most people don't have any money to spare. Plus money doesn't "flow into something". For every buyer, there's a seller.
I hate to break this up for you, but when inflation hits, most people don't have any money to spare. Plus money doesn't "flow into something". For every buyer, there's a seller.
Assets aren't "stores of value" in the sense that they somehow store the money that you spend when you buy them. Unless the asset is a stock or a bond being issued by a company to finance a new project, the money doesn't go into the asset, but into the seller's pocket.
If real inflation hits and people, on average, start witnessing their wages plunge in real terms, their first reaction won't be "quick, I need to buy some Bitcoin" - they won't have the means to. Instead, they'll go "hey, I have some Bitcoin, let's sell some to make rent".
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