Over the past several months, prices everywhere have risen. In fact, David Z. Morris notes, inflation has hit a 13 year high recently. This can cause a lot of problems for long-term investors as if the interest rates and returns on their investments doesn’t exceed the rate of inflation, they may find themselves in worse financial shape than they had expected.
Bitcoin has been performing well, and it’s been outperforming other long-term investments. Morris writes, “Bitcoiners have long argued the digital currency has the potential to act as a hedge against inflation in any single currency.” This, of course, becomes stronger as Bitcoin achieves more legitimacy.
Is Our Current Rate of Inflation Likely to Stick Around?
This depends on who you ask. Morris notes that those investing at the professional level believe that the inflation we’ve been seeing in the last months and years is temporary and that we shouldn’t worry too much about it. Historically, long-term investors have touted bonds as a key into judging when long-term inflation is settling in.
Morris writes, “The Bond market is a gauge of investor sentiment on inflation because high long-term inflation cuts into the return from bonds, which have maturities ranging from five to 30 years.” As such, when long-term investors expect high rates of inflation, they begin selling off those bonds.
Since almost no one is participating in this practice, it appears that most investors believe that the current surge in inflation is simply a biproduct of the COVID-19 pandemic. Morris credits some of this to the supply-chain problems we’ve had.
What Do Bitcoin and Inflation Have to Do with Each Other?
Morris points out that recent data shows that Bitcoin is tracking higher bond yields, and that those will “rise sharply if and when the broader market changes its mind about Jerome Powell’s predictions” – namely that interest rate hikes are coming. Whether or not that comes to fruition, Bitcoin can be wildly erratic in its market behaviors. Despite the risks involved, it is gaining more legitimization all the time. Houses are being bought and sold.
Despite that, there is a lot of disagreement about how Bitcoin will perform long-term. Early data shows that it’s holding up, especially because it isn’t regulated by a central bank. It also has a finite supply – so one can’t just print off more Bitcoin if the supply is hoarded up. Forecasters also believe that the rapid increase in value due to the pandemic has helped to bolster it against inflation.
It’s looking like Bitcoin can hold up, the question is whether it will hold up long-term and to what degree over other, more traditional, long-term investments.