Chen Li is the CEO and Founder of digital asset venture capital firm Youbi Capital.
Inflation: the word on everyone’s lips in 2022. With rising squeezing budgets more than we’ve seen prices in the last four decades, investors and consumers are desperate for ways to protect their purchasing power.
Conventional wisdom says that investing in stocks and equities is generally a good way to outrun inflation. Now, this thinking is translating to cryptocurrency and the market’s biggest and oldest coin – Bitcoin (BTC). Despite its rising correlation to the Nasdaq stocks index and other risk assets, Bitcoin is actually growing in adoption thanks to inflation in the global economy. Let’s explore why the coin’s prospects are still strong this year and beyond.
Bitcoin as a store of value
First, let’s look at investors attempting to leverage BTC as a store of value. A store of value is key during times of inflation since it maintains its value rather than depreciates. Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual. Much like gold, bitcoin is rare and counts a finite supply. It begs the question: could the cryptocurrency become a store of value for the 21st century?
The answer depends on who you ask. For some, this year’s market slump is indicative of an immature asset that is not yet a store of value. For others, like investment bank JPMorganthere is still the potential for BTC to become an “alternative” currency similar to gold.
“After the Lehman crisis, the role of an ‘alternative’ currency was played by gold,” the bank’s strategists wrote in May. “After the virus crisis, this role was played by both Bitcoin and gold.”
The bank argues that because BTC survived “the long winter” of 2018 – when dropped more than 70% – institutional investors now have increased confidence that there will be a market for the digital currency prices moving forward. The total market cap of BTC and gold could eventually equalize as they serve the same purpose, the strategists noted.
For bulls, BTC is still a mechanically deflationary currency that is designed to hold its value over time. Just like the internet bubble at the turn of the century, Bitcoin sees the cryptocurrency market volatility of today’s believers attributed to the hype and financialization of a revolutionary trend in its early days.
Bitcoin in international trade
Another growing Bitcoin use case is in international trade. Following this year’s sanctions from the international community, a Russian official flirted with the idea of accepting BTC as payment for its oil and gas exports from “friendly” countries. Despite the country’s evident desire to circumvent sanctions, such a move would set a precedent in international trade and potentially lead to further adoption.
This effort to “de-dollarize” trade could also see bitcoin’s volatility start to ease as more such trades are made in the digital currency.
Of course, any discussion to move away from the dollar in global trade will catch the attention of the United States. And, with all of this noise, it’s clear the US government doesn’t want to get left behind. In March, President Joe Biden’s executive order on digital assets announced a new approach to support innovation. Biden wants the US to rival China, a country that is far more advanced with its digital yuan projects. Ongoing investigations are looking into a digital dollar and the future of money. However, US Treasury said a digital dollar could take years to develop. Therefore, in the interim, it’s hard to see any competitor taking BTC’s place as the preferred digital currency in international settlements.
Bitcoin to protect from hyperinflation
Finally, it’s worth considering the uneven impact of inflation on a global scale. Further than the dollar, inflation is punishing local currencies in the developing world. In some places, inflation is in the double digits with fears it could lead to rapid, excessive, and out-of-control general price increases. This looming threat of hyperinflation is contributing to more bitcoin buyers.
Unfortunately, this is a common economic story across the globe. From Turkey to Nigeria to Russia, many citizens are investing in cryptocurrency to escape high currency depreciation. It remains to be seen how governments respond. Some like Nigeria have banned the coin outright. Others like El Salvador have accepted bitcoin as legal tender.
In either case, BTC is finding a strong foothold among consumers in the developing world – and this is a trend that shows no signs of slowing.
Irrespective of today’s crypto uncertainty, Bitcoin remains the market leader and an established global name. Now, fortuitously, the coin is also reaching increased scalability. For years, Bitcoin has been held back by its comparatively long transaction times. Recently, however, scalability has become less of a hurdle thanks to layer 2 developments like the Lightning Network. This method, which enables fast transactions among participating nodes, grew by over 400% in the past year.
In my view, it will be scalability with adoption that ultimately decides BTC’s dominance in international transactions and investments. With a potential answer to Bitcoin’s scalability problem, in addition to the expanding use cases described above, the future looks promising even amidst this market’s choppy waters.
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– As inflation ‘Mellows Out’, a Bottom in Crypto is Likely in ‘The Back Half of 2022’ – VC Investor
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