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 decline in value, it remains to be seen how far the broader economic landscape will affect the currency’s long-term adoption.

Why? Because bitcoin use cases are multiplying in the context 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 multiple 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.

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Bitcoin as a store of value

With inflation in the United States hitting 8%, investors are desperate for a store of value – an asset that can maintain its value over time without depreciating in value. In the past, gold was the proven gamble against inflation. This time, $10 billion has been withdrawn from gold funds as investors increasingly choose a new alternative: Bitcoin.

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

It is important to note that greater market maturity is needed before Bitcoin is fully embraced as a store of value. A mature market has long-term investors who can afford to withstand price drops. Likewise, a mature market like gold relies on common frameworks, measurements and classifications for all market participants. This year’s cryptocurrency volatility does not yet reflect a mature market.

Despite the currency’s growing 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 dotcom bubble at the turn of the century, today’s wild ups and downs can be somewhat attributed to the hype and financialization of a revolutionary trend in its infancy.

As digital assets gain wider adoption, 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 many reasons why cross-border digital payments are being explored even in these times of high inflation. For example, the Bank for International Settlements (BIS) recently developed prototypes for a common digital currency platform. The development, dubbed ‘Project Dunbar’, proves that financial institutions can use central bank digital currencies to transact directly with each other on a shared platform. The problem for the banks, however, is that the realization of such a project takes years.

Earlier this year, the World Economic Forum highlighted the benefits of digital currencies in global trade. They include speed – reducing payment settlement time from days to minutes – as well as alternative credit – using a public blockchain ledger to share financial history and take out loans for imports and exports. Bitcoin is by far the most popular cryptocurrency and is well positioned to lead the introduction of digital cash into the financial ecosystem.

We are already starting to see this happening. Following sanctions imposed by the international community this year, Russia considered accepting Bitcoin as a means of payment for its oil and gas exports from “friendly” countries. Despite the country’s apparent desperation to circumvent the 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 the current economic pain. Inflation erodes the purchasing power of currencies other than the dollar, which has a particularly severe impact on developing countries. From the Turkish lira to the Nigerian naira, inflation is penalizing local currencies amid a post-pandemic recovery. Here, economic uncertainty and instability lead to greater Bitcoin adoption.

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

Bitcoin is increasingly emerging as more than a store of value for people – it is a hedge 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 outlook around Bitcoin are changing with inflation. From investors experimenting with crypto as a store of value, to international banks and governments using it commercially, to populations trying to protect their purchasing power, we are entering a new phase of change.

Coincidentally, increasing adoption is happening simultaneously with greater scalability. Bitcoin has been held back for years by its relatively long transaction times. Recently, however, scalability has become less of an obstacle 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 currency in international trade and social currencies. Watch this place.

Chen Lic is CEO and founder of Digital Asset VC at Youbi Capital

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