Bitcoin and inflation: how cryptocurrency protects savings
Bitcoin as a tool against inflation
The cryptocurrency Bitcoin (BTC) has several characteristics that make it attractive against inflation:
- Limited issuance: Bitcoin is limited to a maximum of 21 million coins. As of January 2025, more than 19.5 million Bitcoins have already been mined, about 93% of the total. This means that the creation of new coins will continue to slow down, eliminating the possibility of uncontrolled issuance, as is the case with fiat currencies. By comparison, the U.S. printed more than 20% of all dollars in circulation in 2020, leading to higher inflation. According to the Federal Reserve (FED) and other economic sources, the U.S. inflation rate increased from 1.4% in 2020 to 7% in 2021, the highest rate in 40 years. This data illustrates how a significant increase in the money supply has contributed to accelerating inflation, making asset protection, such as through Bitcoin, relevant to many investors.
- Decentralization: Bitcoin runs on blockchain technology distributed among thousands of nodes (nodes) worldwide. This eliminates the possibility of central control or manipulation by government or corporations. For example, in 2021, the number of active Bitcoin nodes was over 13,000, confirming the high level of decentralization. In comparison, traditional financial systems depend on centralized institutions that can change rules or manipulate the money supply.
- Transparency: Every Bitcoin transaction is recorded in a blockchain public ledger. This provides complete transparency, as anyone can verify any transaction. For example, in December 2024, the transactions recorded on the Bitcoin blockchain exceeded 800 million. This transparency minimizes the risks of fraud and manipulation.
- Global: Bitcoin is available worldwide and is not tied to the economy of a single country. In 2023, more than 300 million people worldwide used cryptocurrencies, including Bitcoin, for purposes ranging from transferring money overseas to investing. For example, in hyperinflationary countries such as Argentina and Venezuela, Bitcoin usage has increased by 40% over the past two years. This makes it an effective tool for asset protection in economic crises.
Global experience with Bitcoin use
Global experience shows that Bitcoin can serve as a tool to protect against inflation.
Hyperinflation in Venezuela
In Venezuela, inflation reached 65,000% in 2018, effectively making the national currency, the bolivar, unsuitable for savings. In such an environment, Bitcoin usage grew by 833%, according to LocalBitcoins, as citizens looked for a way to save their assets and perform international transfers without losing out on the currency's depreciation.
Crisis in Turkey
Since 2018, the Turkish lira has lost over 80% of its value against the U.S. dollar. In 2021, Bitcoin trading volume in Turkey increased by 300% in response to the lira's devaluation. Many citizens use Bitcoin to buy stable assets and avoid devaluation.
Growing interest in developed countries
After the massive stimulus of the U.S. economy in 2020, which included printing more than $3 trillion, inflation reached 7% in 2021. Against this backdrop, many investors began to view Bitcoin as "digital gold." In 2021, institutional investors such as Tesla and MicroStrategy invested more than $1.5 billion and $3 billion in Bitcoin, respectively, solidifying its status as an inflation-hedging asset.
Advantages of Bitcoin versus traditional assets
Gold
Bitcoin is more straightforward to transport and store than gold. For example, 1 troy ounce of gold weighs about 31 grams and requires physical storage in unique safes or vaults, which can cost anywhere from 0.5% to 1% of the total value of gold annually. On the other hand, Bitcoin can be stored in a digital wallet, which requires no physical space and does not involve additional transportation costs.
Bitcoin transactions are faster and cheaper. The average time to confirm a transaction on the Bitcoin network is about 10 minutes, whereas transferring gold across borders or between banks can take days. A Bitcoin transaction costs around $2-5, depending on network congestion, while gold transportation and verification fees can reach hundreds of dollars per transaction.
Fiat currencies
Unlike fiat currencies, Bitcoin is not subject to political risks and sanctions. For example, in 2022, amid international sanctions against Russia, many citizens began using Bitcoin to transfer funds abroad, circumventing restrictions on bank transactions. According to Chainalysis, the volume of Bitcoin transactions in Russia increased by 243%.
Bitcoin's lack of government control provides independence. For example, citizens actively use Bitcoin to preserve capital and circumvent currency restrictions in countries with authoritarian regimes, such as Venezuela and Iran.
Stocks
Unlike stocks, Bitcoin's price is not affected by the financial health of individual companies, corporate strategy, or leadership changes. For example, in 2022, shares of large tech companies such as Meta and Amazon fell 60% and 50% due to corporate problems and a general market downturn. At the same time, although volatile, Bitcoin's price is driven by global economic trends and demand for the cryptocurrency.
Bitcoin's high liquidity provides access to funds at any time. According to CoinMarketCap data for 2023, its average daily trading volume is around $30 billion. This lets investors quickly buy or sell an asset without significantly affecting the price. In comparison, trading stocks can take days, especially regarding large blocks or less liquid assets.
Bitcoin's future in an inflationary environment
Bitcoin's role as an asset protection tool continues to grow. However, the following challenges need to be addressed for widespread acceptance:
- Eliminating volatility: Bitcoin is known for its volatility, which deters some investors. The solution may be to introduce instruments such as futures contracts and options that help smooth out price fluctuations. For example, Bitcoin's volatility fell by 25% in 2021 following cryptocurrency-focused exchange-traded funds (ETFs) popularity. This has attracted new institutional investors, increasing the total market capitalization to $1.2 trillion.
- Regulation: International cooperation in developing regulatory measures must create a transparent environment. For example, in the U.S., the Digital Commodities Consumer Protection Act initiative was passed in 2023, defining cryptocurrency trading rules. This boosted investor confidence, increasing the flow of funds into Bitcoin by 18% in one year.
- Education: Improving financial literacy is key. In 2022, a study by Grayscale found that 62% of investors are not sufficiently aware of cryptocurrencies. Introducing educational programs, such as online courses or seminars, helps improve understanding of the cryptocurrency market. For example, the number of cryptocurrency users increased by 35% in South Korea after a massive educational campaign.
- Infrastructure: Developing convenient and reliable platforms for working with Bitcoin facilitates its mass use. According to Chainalysis, the number of cryptocurrency ATMs will increase by 55% to 40,000 devices worldwide in 2023. This makes access to cryptocurrencies easier, especially in developing countries.
Conclusion
Successful use of Bitcoin requires an understanding of its benefits and risks and further development of infrastructure and regulation. In the long term, cryptocurrencies such as Bitcoin have the potential to change the financial landscape by providing people with a new way to protect their savings.