Over the past decades, central banks like the Federal Reserve have failed to keep inflation rates stable. Bitcoin may benefit from this trend. After the cryptocurrency’s upcoming halving, after which the coin will have “economically indisputable reasons” to become a legitimately competitive store of value versus other world currencies.
Connection Between Halving and Inflation
May 2020, Bitcoin will see its next halving, where today’s reward of 12.5 BTC will drop to 6.25.
This halving — the third in the cryptocurrencies history — is particularly important, says economist Peter C. Earle at the American Institute for Economic Research.
Consider the current annualized rate of “inflation” for Bitcoin is between 3.7 percent and 3.8 percent (at an average of 144 blocks mined per day at 12.5 BTC each, yielding around 1,800 new BTC each day).
For context: describing the increase in the number of Bitcoin available as “inflation” here is comparable to new gold being mined, as opposed to the existing, above-ground gold stock.
Following halving — with Bitcoin inflating at about 1.8 percent rate annually (half its current rate) — the coin will theoretically be inflating at a rate lower than the Federal Reserve target of 2 percent per year.
Failure of Central Banks
When considering monetary policy worldwide, the upcoming halving comes at an interesting time.
Despite efforts made over the past 10+ years, the Federal Reserve — and other central banks — have attempted and failed to engineer a rate of inflation; and as Earle highlights, even a passing review of history shows that “inflation is second only to war where forces laying waste to civilizations are considered.”
Despite this failure, central banks have not changed course. In fact, they have doubled down, embracing policies such as quantitative easing to inject liquidity directly into the economy.
On the other hand, Bitcoin’s limited supply has always been a draw for investors and traders acquainted with the effects of inflation on purchasing power.
The take away from this is as follows: with the rate of production of Bitcoin, via mining, taking place at a rate less than the Federal Reserve’s stated target rate, come May 2020, Bitcoin looks to have “economically indisputable reasons” to become a legitimately competitive store of value versus other world currencies.
Bitcoin: Quantitative Tightening
With Bitcoin, limiting the ultimate number of the coins that will ever exist — and by making their origination adhere to a predictable and transparent protocol — the coin closely approximates a monetary policy known as quantitative tightening. This being the opposite of the quantitative easing campaign of the central banks.
With inflation rates that are lower than both nominal and real rates of inflation, Bitcoin’s use case begins to look increasingly less speculative; this will undoubtedly add to the coin’s draw and likely increase its store-of-value characteristics, potentially sparking an uptrend in price, Earle says.