Bitcoin: a Hedge against Currency Devaluation
Key points
- Currency devaluation is a deliberate downward adjustment of the official exchange rate of a currency to reduce the value of the currency.
- Currency Devaluation causes Inflation.
- Bitcoin with its limited supply, rapid adoption, high security and high liquidity is the best hedge against currency devaluation at the moment.
What is Currency Devaluation?
The currency devaluation is a deliberate downward adjustment of the official exchange rate of a currency to reduce the value of the currency. In simple terms it is the decreasing of the value of a country’s currency in a deliberate fashion.
Effects of Currency Devaluation
- Positive Effects: There are various positive effects of currency devaluation and it is the very reason why a country devalue its currency against the foreign exchange. As the currency devaluation reduces the value of currency it attracts the foreign investors to make large investments in a country thus benefiting the economy of the nation. Also, the currency devaluation makes the foreign products and services expensive and thus encourages people to buy the local products and services thus putting back the money in the local economy.
- Negative Effects: If not strategically introduced, currency devaluation can be a double edged sword and as more and more foreign capital comes in and the local products and services are bought by people, the demand exceeds the supply and the inflation kicks in. Apart from causing inflation, if repeated devaluation is made, it gives a bad name to the nation and foreign investors become reluctant to invest as they think that some internal hidden problem is there with the economy of the country.
Why is Bitcoin a Hedge against Currency Devaluation?
Though there are other traditional hedges that can protect against the inflation caused by currency devaluation such as gold, stocks etc, there is a new asset class known as Bitcoin that can prove to be the hedge against currency devaluation as well as inflation. The reasons for being such a good hedge lie in Bitcoin’s Architecture and are as follows:
Limited Supply
Bitcoin has a limited supply of 21 Million coins and only a bit more than 18 Million Bitcoin is in circulation right now. This makes Bitcoin an extremely rare commodity. Being rare will have a deflationary effect and its price will appreciate over time.
Rapid Adoption
The rapid adoption of Bitcoin has led to building a solid base beneath the cryptocurrency and various institutional investors are considering Bitcoin as a store of value leading to stabilizing its volatile nature and thus a better option than gold as a hedge against currency devaluation.
High Liquidity and Security
Bitcoin is extremely liquid as considered to other traditional hedges against currency devaluation including gold, real assets etc. Bitcoin can be bought and sold in an instant which makes it a better candidate when compared to other potential asset classes that have a hedge against currency devaluation. Also, the Bitcoin network works on blockchain technology and is extremely secure.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
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