Why inflation – not the crypto crash – will define Bitcoin?

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Cryptocurrency is down. Bad. Bitcoin is at its lowest price in 18 months and the resulting headlines are dramatic. And yet, in the face of the crypto crash, all hope is not lost. Despite Bitcoin’s declining value, it remains to be seen how the broader economic landscape will affect the coin’s long-term adoption.

Why? Because Bitcoin’s use cases are actually growing against the backdrop of global inflation. In addition to appreciation, Bitcoin is finding new utility in this moment of market madness. Crypto’s largest and oldest coin holds promise on several fronts – from governments exploring it in international trade to investors looking for a digital store of value. Let’s take a look at why inflation – not the crypto market crash – will define Bitcoin in the coming years.

Bitcoin as a store of value

With inflation in the United States soaring to 8%, investors are desperate for a store of value – an asset that can maintain its value over time without depreciating. In the past, gold has been the tried-and-tested inflation hedge bet. This time, $10 billion has been taken out of gold funds as investors increasingly turn to a newer alternative: Bitcoin.

And why not? Like gold, Bitcoin is rare and has a finite supply. Citing Bitcoin’s $700 billion market cap, compared to the roughly $2.6 trillion in gold owned as an investment, Goldman Sachs said in January that the cryptocurrency currently has a 20% share of the store of value market.

It is important to note that further market maturity is required before Bitcoin is fully embraced as a store of value. A mature market has long-term investors who can afford to weather price drops. Likewise, a mature market like gold relies on common frameworks, metrics and classifications among market participants. Cryptocurrency volatility this year does not reflect a mature market yet.

Despite the currency’s increasing correlation with the Nasdaq and other risky assets, Bitcoin is still a mechanically deflationary currency designed to maintain its value over the long term. Much like the internet bubble at the turn of the century, the current wild highs and lows during the day can be somewhat attributed to the hype and financialization of a revolutionary trend in its early days.

As digital assets are more widely embraced, you can expect institutional investors and crypto-specific funds to act as stabilizing forces in the market. This will bring much-needed maturity and potentially more buyers who see Bitcoin as a store of value.

Bitcoin in International Trade and Settlement

Speed, efficiency, risk: there are several reasons why cross-border digital payments are also being investigated in these times of high inflation. For example, The Bank for International Settlements (BIS) recently developed prototypes for a common platform for digital currencies. Code-named ‘Project Dunbar’, the development proves that financial institutions can use central bank digital currencies to transact directly with each other on a shared platform. The problem for banks, however, is that it will take years to realize such a project.

Earlier this year, the World Economic Forum outlined the benefits of digital currencies in global trade. They include speed – bringing payment settlement time from days to minutes – as well as alternative credit – using a public blockchain ledger to share financial history and secure loans for imports and exports. As it is by far the most popular cryptocurrency, Bitcoin is well positioned to lead the way in introducing digital money into the financial ecosystem.

We are already starting to see this happening. Following this year’s sanctions from the international community, Russia considered accepting Bitcoin as payment for its oil and gas exports from “friendly” countries. Despite the country’s apparent desperation to evade sanctions, the move would set a precedent in international trade and, once again, lead to further Bitcoin adoption. This attempt to “de-dollarize” trading could also cause Bitcoin’s volatility to begin to decline as more such trades are made in the digital currency.

Bitcoin in emerging economies

Unfortunately, the majority of the world shares in the current economic pain. Inflation erodes the purchasing power of currencies outside the dollar and this has a particularly hard impact on developing countries. From the Turkish lira to the Nigerian naira, inflation is penalizing local currencies in the throes of recovery from the pandemic. Here, economic uncertainty and instability lead to increased adoption of Bitcoin.

In Turkey, the national currency unraveled against the dollar in the last quarter of 2021. As a result, cryptocurrency trading volumes using the lira soared to an average of $1.8 billion per day across three exchanges. In Nigeria, a similar story of currency devaluations and strict access controls to foreign currencies led to more Bitcoin. Likewise in Russia.

Bitcoin is increasingly emerging as more than a store of value for people – it is a safeguard against hyperinflation. It remains to be seen where this will go. With growth, there could be community pushes leading to more nationwide cryptocurrency adoption, such as in El Salvador.

Whatever happens, it is clear that the conversations and perspectives surrounding Bitcoin are evolving with inflation. Whether it’s investors experimenting with crypto as a store of value, international banks and governments using it commercially, or populations trying to protect their purchasing power, we’re entering a new phase of adoption.

Somewhat coincidentally, increased adoption is happening at the same time as increased scalability. Bitcoin has been held back for years by its relatively long transaction times. Recently, however, scalability has become less of a hurdle thanks to developments such as The Lightning Network and the fast transactions between participating nodes. This is essential if Bitcoin is to take the position of functional money in international trade and social currencies. View this space.

Chen Lic is CEO and founder of digital asset VC at Youbi Capital

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