Why Inflation Defines Bitcoin, Not Cryptocurrency Crash

The encryption is down. Terrible. Bitcoin is the lowest price in 18 months and the resulting headlines are dramatic. Still, not all hope is lost in the face of a cryptocurrency crash. Despite the decline in Bitcoin’s value, it remains to be seen how broader economic conditions will affect the long-term adoption of coins.

why? Bitcoin use cases are actually growing against the backdrop of global inflation. Beyond valuation, Bitcoin is finding new usefulness at this moment of market madness. Cryptographic largest and oldest coins are promising in several ways, from governments seeking it in international trade to investors looking for valuable digital stores. Let’s see why inflation will define Bitcoin in the coming years, not the crypto market plunge.

Bitcoin as a store of value

With inflation rising to 8% in the United States, investors are anxious for valuable assets, that is, assets that can maintain their value over the long term without depreciation. In the past, gold has been tried and errored as an inflation hedging bet. This time around, $ 10 billion has been withdrawn from the gold fund as investors have turned to an increasingly new alternative, Bitcoin.

And why? Like gold, Bitcoin is rare and has a limited supply. Citing Bitcoin’s $ 700 billion market capitalization compared to about $ 2.6 trillion worth of gold owned as an investment, Goldman Sachs said in January that cryptocurrencies were 20% of the current value market stores. Said to have a share of.

It is important to note that further market maturity is needed before Bitcoin is fully accepted as a valuable store. Mature markets occupy long-term investors who can afford to survive price cuts. Similarly, mature markets like gold rely on a common framework, metrics, and classifications across market participants. This year’s cryptocurrency volatility does not yet reflect a mature market.

Although coins are increasingly correlated with Nasdaq and other risk assets, Bitcoin is still a mechanically deflationary currency and is designed to maintain its value over the long term. Like the dot-com bubble at the turn of the century, today’s wild daytime mountains and valleys may be due in part to the hype and monetization of early revolutionary trends.

Expect institutional investors and crypto-specific funds to act as a market stabilizing force as digital assets become more widely accepted. This will bring the long-awaited maturity and may increase the number of buyers who consider Bitcoin a valuable store.

Bitcoin in international trade and settlement

Speed, Efficiency, Risk: There are multiple reasons why cross-border digital payments are also being considered in these times of high inflation. For example, the Bank for International Settlements (BIS) recently developed a prototype of a popular digital currency platform. The development of the codename “Project Dunbar” proves that financial institutions can use the central bank’s digital currency to trade directly with each other on a shared platform. But the problem for banks is that the realization of such a project remains years ahead.

Earlier this year, the World Economic Forum outlined the benefits of digital currencies in world trade. This includes speeding up payment settlement times from days to minutes, and alternative credits that use public blockchain ledgers to share financial history and undertake loans for imports and exports. Bitcoin is well-positioned to lead the introduction of digital money into the financial ecosystem, as it is by far the most popular cryptocurrency.

We are already starting to see this happen. Following sanctions from the international community this year, Russia was considering accepting Bitcoin as a payment for oil and gas exports from “friendly” countries. Despite the country’s apparent despair of avoiding sanctions, this move sets a precedent for international trade and again leads to further adoption of Bitcoin. This effort to “de-dollarize” transactions could also begin to ease Bitcoin’s volatility as more transactions take place in digital currencies.

Bitcoin in the developing economy

Unfortunately, the vast majority of the world shares today’s financial pain. Inflation has been declining the purchasing power of currencies beyond the dollar, which has a particularly significant impact on developing countries. From the Turkish lira to the Nigerian naira, inflation is punishing local currencies that are on the verge of recovery after a pandemic. Here, economic uncertainty and instability are increasing Bitcoin adoption.

In Turkey, its currency was unleashed against the dollar in the fourth quarter of 2021. As a result, cryptocurrency trading volumes using Lira jumped to an average of $ 1.8 billion a day on the three exchanges. Meanwhile, in Nigeria, similar talk about currency devaluation and strict access control to foreign currencies has led to an increase in Bitcoin. Similarly in Russia.

Increasingly, Bitcoin is emerging as more than valuable to people – it’s protection from hyperinflation. I still don’t know where this goes. As it grows, there may be community promotion, such as El Salvador, that will lead to the adoption of more country-wide cryptocurrencies.

Whatever happens next, it’s clear that Bitcoin conversations and perspectives are evolving with inflation. Whether investors are experimenting with crypto as a store of value, international banks and governments are using crypto in their transactions, or people trying to protect their purchasing power, we’re in a new hiring phase. ____ is inside.

Coincidentally, there is an increase in adoption as well as improved scalability. For years, Bitcoin has been constrained by its relatively long trading hours. However, recent developments such as Lightning Network and high-speed transactions between participating nodes have lowered the scalability hurdles. This is important when Bitcoin occupies a functional money position in international trade and social currencies. Please take a look at this space.

ChenLi CEO and founder of Digital Asset VC. Youbi Capital..