Due to its limited supply and decentralization, Bitcoin is an effective inflation hedge. These factors bring scarcity and resilience.
The two main factors you need to consider when researching “Can Bitcoin Prevent Inflation” are limited supply and decentralization.
Limited supply – brings scarcity
The supply of Bitcoin (BTC) has been algorithmically capped at 21 million. At the end of 2021, 18.77 million bitcoins have entered circulation. In other words, 83% of possible bitcoins have been mined within 12 years of the cryptocurrency’s birth.
Inflation occurs when a country or central bank continues to overprint paper money, resulting in an oversupply of money. Economic theory says that inflation occurs when the money supply grows faster than the actual output of a good or service. This is because households now have more cash to buy the same amount of goods, resulting in higher prices.
Pre-set limits on the circulation of bitcoin mean there will be no oversupply, keeping inflation in check. In addition, the annual mining rate of the digital currency drops by 50% roughly every four years. Given the current supply schedule, Bitcoin will be produced at about half the annual rate of gold and will continue to decline, making it more scarcer than gold and driving its value higher.
Decentralization – increasing resilience
The decentralized structure of Bitcoin keeps it out of the control of a central authority. With thousands of nodes in operation around the world, the Bitcoin network is best protected against external attacks that might try to change its monetary policy and avoid undermining the digital currency’s inherent scarcity. When it comes to decentralization, no other currency can match Bitcoin.
In any authority or organization, coercion occurs through pressure or bribery. However, Bitcoin is immune to these factors as there is no leader to influence and no executive committee to bribe. Since the birth of Bitcoin, its founder, Satoshi Nakamoto, has used a pseudonym. Bitcoin remains a unique digital asset as it has a super-successful track record in the absence of influential leadership.
Anyone can run a Bitcoin node, verify transaction history, and forward transactions across the network. Widespread decentralization means that cryptocurrencies cannot be reused. It also helps distribute tokens and helps Bitcoin get through many challenges. It helps Bitcoin prevent centralized control of information and enables all Bitcoin holders to participate in decision-making.
When businesses interested in Bitcoin tried to change the block size to allow more transactions per block, individual node operators and developers strongly opposed the proposal. This highlights the inherent resilience of Bitcoin as economically powerful entities fail to impose their will on the Bitcoin network.