Bitcoin: A Way for Investors to Hedge Against Inflation

2021 has been a record-setting year for all assets like real estate, stocks and cryptocurrency. In large part, the gains investors are experiencing are thanks to all of the money printing governments are doing in the wake of the ongoing COVID-19 pandemic. The pandemic is forcing regulators to print more money to keep the economy afloat. However, this is not always a good thing. The printing of money leaves many investors and institutions worried about the health of their investments and day-to-day living. If you ask crypto traders and hodlers how they feel about the money printing and inflation, they may have a more positive stance as cryptocurrency markets have seen two parabolic increases in 2021.

This week’s Netcoins Progressive Investor post will explore the relationship between money printing and inflation. By the time you’re done reading, you’ll understand why this is all happening and why the prices of Bitcoin and other cryptos continue to increase as a result.

Record Highs of Money Printing in 2020

Our exploration of the relationship between money printing and inflation starts by taking a brief look back at some key points from a

previous post written a year ago

.

35% of Total Money Supply in The United States Printed in 2020

A graph from the U.S. Federal Reserve published last year

shows a sharp increase

in the total amount of money supply in the U.S. as a response to the COVID-19 pandemic. The increase indicates that 35% of the total money supply was printed just last year.

Fast forward one year, and you can see the total money supply

increased 14.5%

since that content was posted. The end of 2021 will see the money supply reach higher levels, which strikes fears that inflation may be higher than expected going into 2022.

Senator Cynthia Lummis Remains Bullish on Crypto

In 2020, then Senator-Elect Cynthia Lummis was vocal about her belief in Bitcoin as the future of money, and in 2021 Lummis doubled down into cryptocurrency. Senator Lummis, who has been HODLing Bitcoin since 2013, has talked the talk and walked the walk by increasing her Bitcoin holdings by purchasing over

$120,000 in Bitcoin in June

.

Lummis not only believes in the benefit of cryptocurrency for her financial wealth but continues to be a staunch advocate by continuing to introduce pro-crypto legislation.

Lummis and two other senators attempted to insert a bipartisan amendment in the infrastructure bill to shield

crypto investors from increased regulation

. Although the amendment did not pass, Lummis remains bullish on Bitcoin and cryptocurrency in the long run. She is hopeful cryptocurrency investments can find a place in registered retirement funds.

The confidence in Bitcoin as a hedge against inflation may be good news for younger investors who may be hesitant to invest in traditional retirement savings plans as crypto adoption continues to surge.

Crypto Adoption Accelerated By The Pandemic

Last year Ruffer Investments in the UK disclosed 2.5% of their investments are held in cryptocurrency (roughly $675 million). By June of 2021,

Ruffer had sold all of its Bitcoin

before crypto markets crashed from all-time highs in April. Ruffer’s move in and out of Bitcoin netted the firm over $1.4 billion in profit. Not too shabby for a 5-month investment.

Ruffer Investments is but just one large investment firm to profit from Bitcoin in 2021. Since the beginning of the year, a much larger wave of institutional funds has been making their way into crypto, which we will explore later.

Of course, inflation isn’t limited to the U.S. or the U.K. It’s impacting us here at home too but more on that in a little bit.

The Winners and Losers of Money Printing and inflation

Getting into crypto is reasonably accessible as the barrier to entry is low, while at the same time providing a high ceiling for profit. Part of this low barrier to entry lies in the ability to purchase fractions of any cryptocurrency. In contrast, investors can only purchase traditional assets like real estate and stocks as whole units.

The Cantillon Effect refers to the change in relative prices resulting from a substantial increase

in the money supply

. The point at which new money is introduced flows through a specific path.

Those who receive the new money first (typically those closest to the money printing machine) benefit more as they receive more disposable income before prices increase. Unfortunately, those last in line (the lower class) to receive new money can only spend it after prices have increased.

Essentially, this new money can drive prices up, leaving people with less income to invest with and a loss in purchasing power.

In the U.S., the Fed released stimulus checks to citizens and businesses.

Banks received significant stimulus money and then lent to the most credit-worthy companies. These companies, invested the extra cash and in turn created stock and real estate balloons. The real estate market saw home sale prices increase by

unsustainable levels of up to 24% as a result

.

That's why the impact money printing can often be felt as a hidden tax (without actually raising taxes).

While prices increase without wage increases, people find themselves with less money to save.

Is Inflation Always A Bad Thing?

Inflation is not always a bad thing. It is a good thing if your money is in investible assets because it means your assets are growing in value. In some cases

, inflation may be a benefit

if workers’ wages increase to offset the rise in the cost of living.

However, given workers' wages are not growing at the same rate as inflation, bitcoin is acting as hedge against inflation. For this reason, we're seeing an increase of institutional adoption of bitcoin.

Institutional Investment In Cryptocurrency Increases In 2021

The goal of financial institutions is to generate more revenue than in the previous quarter and/or year. If institutions need to hedge against inflation to maintain shareholder confidence, purchasing Bitcoin and other cryptocurrencies provides the best avenue to achieve this goal.

Several financial firms like

UBS, Citigroup, and even celebrities

have publicly voiced their support of and foray into cryptocurrencies, including Mark Cuban, Elon Musk, Kanye West, and Paris Hilton.

Tesla made headlines by making a substantial Bitcoin

purchase of 43,200 BTC

for a whopping $1.85 billion. Tesla did not stop there as the electric automaker accepted Bitcoin as payment for its vehicles for a short while. However, purchases were halted after a brief period. It is safe to say Elon Musk has a vision for Tesla and cryptocurrency in its future success.

Elon Musk was not the only billionaire to make a public entry into cryptocurrency. The renowned Soros Fund also

disclosed a large Bitcoin purchase

, even though they find it dull compared to DeFi’s potential to reshape finance.

Retail investors may begin to follow large institutions’ moves in hopes of becoming the next financial mogul. After all, nobody wants to see their economic freedoms eaten away yearly due to inflation. That's why Bitcoin may be their best protector from capital erosion.

Bitcoin Is A Shield Against Inflation

Investors want to know how to make money during times of growing inflation or, at the very least, not to lose money. It is essential to determine which asset classes are the best to purchase in times of inflation.

Traditionally the best assets to hold during times of inflation are real estate and gold. The worst asset to hold during periods of inflation is cash because the price of goods and services increases, while simultaneously decreasing your purchasing power.

Back to assets that hold value...

Gold is in limited supply, which is why it has historically increased in value. Bitcoin is considered a better store of value than gold. Like gold, Bitcoin is in limited supply.

Bitcoin has a fixed amount of 21 million that will ever be in circulation. On the other hand, the dollar is unlimited in supply.

Plus, every four years, Bitcoin goes through a halving event where the supply of new Bitcoin entering the economy is cut by half. While Bitcoin is deflationary, while the dollar is inflationary.

Even analysts from the institutional giant JPMorgan believe Bitcoin is a great

hedge against inflation

.

Inflation, Cryptocurrency and Institutional Investment in Canada

We would be remiss if we did not explore the impact of inflation in Canada and the relationship to cryptocurrency.

Although much of business and financial news headlines are dominated by our southern neighbours, Canada is not immune to money printing and inflation.

According to Statistic’s Canada, the pandemic has brought Canada’s

highest annual inflation rate since 2003

at a whopping 4.4%.

Canadian institutions and celebrities are also hedging against the increased inflation rate by investing in cryptocurrency. The celebrity investment shark Kevin O’Leary thanks

cryptocurrency’s performance

this past year as it now makes up 10% of the value of his portfolio.

There are also traditional financial firms diving into cryptocurrency to secure a better future. As of October, two of Canada’s

largest investment funds are significantly investing

in cryptocurrency.

The Ontario Teachers Pension Plan took part in a $520 million funding round of the cryptocurrency exchange FTX. In addition to this headline, Caisse de dépôt et placement, invested in the $120 million funding round of the crypto lending platform Celsius Network.

These significant players serve as barometers of the appetite institutions have in hedging for the future of their investors’ financial well-being in the wake of Canada’s rising inflation.

How to Buy Bitcoin to Protect Against Inflation

Although the unintended consequences of money printing in our current fiscal climate have created conditions ripe for inflation to keep the economy afloat, it has undoubtedly benefited savvy crypto enthusiasts. They are not only seeing their crypto portfolios grow but are also being protected against hyperinflation.

Investors who are looking to hedge against rising inflation can look no further than Netcoins to invest in Bitcoin.

Bitcoin,

Ethereum

and

Litecoin

are three stalwart cryptocurrencies we’ve been offering. We’ve also recently added Stellar to the mix.

By

signing up

for a free account with Netcoins, y

ou can buy Bitcoin, Ethereum and other cryptos using bill payments, e-transfers and wire transfers. You can also deposit existing crypto holdings and trade them.

Keep checking in with Netcoins to stay up to date on the latest news and information for investors as 2021 comes to an end and we look ahead to 2022.

‍