Covid-19, US Inflation, and Bitcoin Halving Deflation — Are You Prepared?
With over 26.4 million Americans filing for unemployment benefits within the last month, the jobless rate in America is at 13%, the worst since the Great Depression. In order to prevent an economic collapse of the country, the Feds have started printing money and the machines are on in full swing. In fact, over a trillion dollars have been printed within the month itself. Since people are out of work, businesses are closed and the economy is stagnant, printing money may help to keep things afloat during and after the coronavirus pandemic.
However, the downside of the money printer go brr is that printing USD is inflationary. Inflation is a measure of how the prices of goods and services have increased over time. The central banking systems usually develop their monetary policies around the various price inflation targets so that they can aim to maintain the rise of consumer prices at a stable level. There are three things that can happen after this Covid-19 crisis — deflationary depression, minimum change, or hyperinflation. Let’s look at what these scenarios mean:
Inflation, Hyperinflation, and Deflation
In simple terms, inflation is when prices rise and deflation is when prices fall. It’s possible to have both, inflation and deflation at the same time in different asset classes. Yet, in their extremes, both can be bad for the economic growth of the country. That’s why the Federal Reserve tries to control them. Out of the five types of inflation, hyperinflation is the worst. It’s when prices rise over 50% a month. Hyperinflation often starts when a country begins printing money to pay for its spending. Due to the increase in the money supply, there’s a sharp rise in the prices of goods and services.
Hyperinflation is often associated with some stress to the government budget like war, socio-political unrest, collapse in export or supply prices, or coronavirus in this case. When it becomes difficult for the government to collect tax revenue, there’s a strong need to maintain government spending, and there’s an inability or unwillingness to borrow, it can lead the country into hyperinflation. The hyperinflation in Zimbabwe in 2007, the currency instability in Venezuela in 2016 due to ongoing socioeconomic and political crises are examples of past hyperinflation events in the world. But with the novel coronavirus, no one really knows what the after-effects of the lockdown will be on the economy. Most economists, however, argue that inflation, and possibly hyperinflation are bound to happen.
Deflation occurs when the prices of goods and services decline and the rate of inflation fall below 0%. Deflation can happen when the money supply of the economy is limited. It is also linked with significant unemployment and lower productivity levels for goods and services. While the US is printing more money, the supply of Bitcoin is about to be reduced by Bitcoin halving. Bitcoin will be amongst the most deflationary currencies in the world after the halving event, set to happen in the coming month.
What Should You Invest In?
If you’re an investor in the US looking for a powerful inflation hedge, you must be wondering what’s the safest investment you can make, despite the current situation? The classic move is to buy gold. But if you buy gold on paper, in an environment of hyperinflation, it could very well turn into ashes. Secondly, if you want to buy actual gold, it might be difficult to have physical gold delivered to your doorstep and if you had to convert it into dollars, it would be even tougher.
So, what’s the solution? Consider digital gold — BTC.
Bitcoin Halving and It’s Expected Effects
Currently, as of block 627,900, it’s almost 99% of the way through to the Bitcoin halving event, estimated to happen on 12th May 2020. There are many predictions about what will happen to the currency once the halving is done. One of the major details is that Bitcoin is expected to have a significantly low inflation rate, lower than fiat currencies.
As per the crypto analyst Mati Greenspan, post the halving, Bitcoin’s annual inflation rate will be 1.8%, compared to the inflation rate of 3.41% for fiat currencies around the globe. This will make Bitcoin a highly attractive asset in the next few months and years.
Bitcoin’s halving is considered deflationary as the purchasing power of Bitcoin increases over time. Even though it may seem volatile at the moment, it’s expected to stabilize in the long run. Also, it’s important to note that the total supply of Bitcoin is fixed and thus, the purchasing power will continue to rise gradually as it’s demand will increase with time. Since there will only be 21 million Bitcoins, it makes them scarce and increases their market value.
· Bitcoin’s inflation rate fell from 50% in 2011 to 3.8% in the first quarter of 2020.
· Between 2011 and 2014, the inflation rate dropped to 12%
· After the halving in 2016, when the reward block was reduced from 25 BTC to 12.5 BTC, the inflation rate fell further down to around 5%
· In February 2020, the inflation rate was between 3.59% and 3.86%
· Within just 77 days, the inflation will drop lower than 1.8% which is lower than the average inflation rate of central banks (target around 2% by the Federal Reserve)
Since the United States may be experiencing inflation due to the unlimited quantitative easing measures that are implemented by the government as a result of the pandemic, Bitcoin can offer a hedge to investors in the country.
In fact, if the globe sees a rise in the demand for Bitcoin along with low inflation and fixed supply after the halving, this is an asset that’s looking highly bullish in the near future.
Within the next few decades, millennials will be the wealthiest generation in history as they’re making a major shift from traditional banking to the unconventional currencies like BTC. Are you investing in Bitcoin? If yes, don’t forget to store your assets in a safe and secure hardware wallet such as our Vault E — A hardware wallet built for simplicity.