Coin Metrics on Bitcoin’s Inflation Resistance

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For most of Bitcoin's existence, institutions have often argued that Bitcoin is a risky, speculative asset , has been staying away from investing in Bitcoin. However, over the course of 2020, many institutions have begun to endorse Bitcoin. One of the most immediate reasons for this change is that Bitcoin can serve as a good hedge against inflation.

In early May, for example, billionaire hedge fund manager Paul Tudor Jones announced that he had more than 1% of his assets in Bitcoin superior. Explaining that he sees it as a hedge against inflation, he said: "We are witnessing a great monetary inflation - an unprecedented expansion of every form of money that has never been seen in the developed world."< /span> 

In their recent report "Why Corporate Treasuries Might Consider Bitcoin," Fidelity Digital Assets put potential Inflation is one of the main reasons why businesses are starting to consider holding Bitcoin in corporate treasury bonds. Companies such as MicroStrategy and Square have recently bought bitcoin, saying they see it as a protection against inflation.

The rapid spread of COVID in early 2020 changed the macro environment seemingly overnight. Following the market crash in March 2020, global central banks began printing money and rolling out quantitative easing measures, coupled with aggressive fiscal stimulus, at an unprecedented pace. At the end of March, the United States passed the CARES Act, providing stimulus funds worth about $2 trillion. Therefore, the U.S. M2 money stock, as shown in the figure below, has grown enormously from about $15 trillion to about $19 trillion over the course of 2020. After the 2007-2008 financial crisis, from January 2008 to January 2010, the M2 money stock increased by less than $1 trillion.         

Source: FRED Economics Data

Quantitative easing and growth in the M2 money stock do not necessarily lead directly to higher inflation as newly printed money usually will remain in bank reserves. But coupled with rising fiscal deficits due to a lagging global economy, rampant quantitative easing pushed the Commonwealth Bank to its limits and created conditions that could lead to a sharp rise in inflation.      

Source: Federal Reserve Bank of New York, Microeconomic Data Center

While inflation is still around 2%, there is increased uncertainty about underlying future inflation. In other words, while the median estimate of expected inflation remains pegged at around 2%, the difference in expectations has widened. This is reflected in the chart below, where data from the New York Fed shows that after March 2020, inflation uncertainty increased above 3%.         

Source: Federal Reserve Bank of New York , Center for Microeconomic Data

This increase in uncertainty is also reflected in the latest monetary policy statement issued by the Federal Reserve in August 2020 middle. While the Fed has historically targeted 2 percent inflation, the updated statement said it "is likely to achieve inflation moderately above 2 percent for some time."

Bitcoin, by contrast, has not been affected by monetary policy uncertainty. One of Bitcoin's core attributes is its predictable supply schedule. Every time a new block is mined, new bitcoins are issued as a reward to the miners who successfully mine that block. This is the only way to create new bitcoins and is a key part of the bitcoin protocol.

Bitcoin’s current block reward is 6.25, that is to say, every time a block is mined, 6.25 will be issued new bitcoin. On average, a block is mined every ten minutes, which usually means about 800-1000 new bitcoins are issued every day. Since the exact frequency of new blocks being mined is unpredictable and varies slightly from day to day (Bitcoin's difficulty is adjusted every two weeks, keeping the average block time at around ten minutes), in the long run this supply issuance It is certain and predictable.

Importantly, the supply and issuance of Bitcoin is also transparent and auditable. Anyone can run a Bitcoin node and independently verify Bitcoin's circulation throughout history. The chart below shows Bitcoin’s daily issuance going back to 2012, using the 30-day moving average.

Source: Coin Metrics Network Data Charts

Bitcoin issuance is reduced by 50% every 4 years. These halvings are also a core part of the Bitcoin protocol and are predictable in the future. The most recent halving took place in May 2020, which brought Bitcoin’s average annual inflation rate down to below 2%.  

Source: Coin Metrics Network Data Charts

Unlike currencies, the total amount of Bitcoin has a hard upper limit. Halving occurs every four years until a supply cap of 21 million bitcoins is reached. This means we can predict the future pretty well and have a clear idea of what Bitcoin's inflation rate will look like in 1 year, 5 years, 10 years.         

Source: Bitcoin- A Novel Economic Institution

Bitcoin’s predictable and transparent financial policy ultimately makes it a hedge against inflation Good potential tool. While the U.S. dollar and many other currencies face increased uncertainty about inflation expectations in the coming years, Bitcoin’s inflation expectations are predetermined. Due to its regular halving and maximum supply cap, Bitcoin's inflation rate will decrease in the future, while the non-currency's inflation rate may increase.

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