Article by Vlad Andrei
This article first appeared on albaronventures.com
Does Bitcoin price rise in response to the rising debt levels? Was Bitcoin created to protect people from inflation? Let’s discuss this and see.
More debt, more inflation
Debt is often compared to being a double-edged sword.
Countries borrow money to stimulate growth and large internal projects to allow a better economy and a higher quality of living.
On the other hand, debt comes with interest. Many countries end up in a vicious cycle of borrowing or printing more money to pay off their debts!
The more money a country borrows, the more it has to pay back in the future. This means future generations will end up having to pay interest on that debt.
While bigger economies such as the U.S. can borrow in their own currency, small-to-medium sized economies are oftentimes forced to borrow in foreign currency.
This makes debt problem even worse for smaller economies because their currencies suffer comparably more depreciation (aka more inflation).
Is Bitcoin Inflation Proof?
The rapidly growing national debt (and thus inflation) has been a hot topic in the past decade.
Actually, Satoshi Nakamoto created Bitcoin as an escape from the powerful influence of centralized financial organizations and central banks on the wellbeing of people. Or stated differently, as an escape from inflation!
In the Joint Economic Committee in November 2019, the Chair of the Federal Reserve, Jerome Powell, noted that the U.S. national debt is growing faster than U.S. nominal GDP. This is a strong indicator that there may be an economic downturn ahead!
For example, currently, the U.S. debt is about $23 trillion. This is roughly $70,000 per citizen. Now, the debt-to-GDP ratio is at 106%. This exceeds the previous highest debt-to-GDP ratio during the Second World War!
Debt Levels and Bitcoin Price
It’s difficult to draw any final and direct conclusions of how debt levels impact Bitcoin price.
However, it’s a fact that a demand for fiat currency alternatives such as Bitcoin tends to skyrocket in the wake of extreme inflation (hyperinflation) and political or economic uncertainties.
Most Western countries haven’t experienced recent hyperinflation periods, but it is relatively frequent in economically less stable countries.
For example, in Venezuela, the overall inflation rate has increased to a staggering 53,798,500% since 2016.
For this reason, some Venezuelans have turned to Bitcoin as a means to protect their fiat money from evaporating to nothing.
The more people want to purchase Bitcoin, the more its price will increase, (provided the supply of Bitcoin stay fixed).
Yet, in case of Venezuela, with a total population of about 32 million people, a minority of Venezuelans purchasing Bitcoin likely won’t have an immense effect on its price. However, in a country with a larger population, the impact would be more substantial.
Here is an example of Bitcoin price rising due to inflation. Bitcoin was around $4,000 for the first few months in 2019, but then increased to over $12,500 in July. This happened in response to China devaluing its yuan (as a response to U.S. tariffs and the rising tension between China and US).
Here is an example of Bitcoin price rising due to a political uncertainty. Bitcoin saw a 10% jump in price within the week following the assassination of Iranian military commander Qassem Soleimani on January 3 of this year.
Bitcoin price will most likely rise in response to the rising debt
Since Bitcoin is a relatively new asset, there is no much historical data to understand how debt levels impact its price.
However, given the recent history and fundamental properties of Bitcoin, the prediction is that demand for Bitcoin and thus its price will rise in response to the rising debt levels.
There can only be 21,000,000 Bitcoin, 18,155,012 of which are already in the market. The stable supply and fixed hard cap make Bitcoin far superior to fiat currencies.
Debt levels are expected to increase in the future (and thus inflation will increase as well). Bitcoin, however, will remain stable in its supply and will act as relatively safe alternative for the millions of fiat holders around the world.
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