Bitcoin and Inflation Relationship

Recently, we have been seeing cryptocurrencies constantly in the recipes for exiting the economic crisis. We discuss the contribution of digital currencies to the markets and their advantages against fiat currencies. So how does Bitcoin fight inflation, which is the nightmare of the markets? In the first weekend reading of the new year, we wanted to tell you about the relationship between Bitcoin and inflation.

In order to better understand the relationship between Bitcoin and inflation, we first need to know exactly what inflation is. Inflation increases the general level of prices; that is, the price of goods and services sold in a market for fiat money. The reason for this is the depreciation of the nominal currency and the decrease in the purchasing power of the currency.

Although there are many reasons for the depreciation of fiat currencies, one of the main reasons is excess supply. Fiat currencies are tied to a central bank and are governed by monetary policies. There is no obstacle for Central Banks to print as much money as they want technically. However, the unlimited supply of fiat currencies brings inflation. The value of money and its purchasing power decrease.

Although it is a digital currency and has very limited use, Bitcoin is compared to fiat currencies in every aspect. The increase in awareness and usage areas also contributes to the increase in the value of Bitcoin. Bitcoin, which we define as digital money, has not yet been legally defined. There are many people who define Bitcoin as a commodity, currency or security.

Bitcoin is an electronic currency that is decentralized and managed by an algorithm. The algorithm that Bitcoin is connected to cannot be interfered with from the outside. This means that the monetary policies determined when designing Bitcoin cannot be changed. Bitcoin production does not increase every year according to demand, on the contrary, it becomes more difficult to produce. Therefore, Bitcoin is not an inflationary currency.

Bitcoin production is subject to certain rules and is designed to produce 21 million Bitcoins in total. In the currencies produced by mining, miners receive the block reward that comes out of the solved blocks. Every 210,000 blocks (which equates to about 4 years), the mining reward is halved. In other words, the amount of Bitcoin released every 4 years decreases. Thus, the internal value of money increases as its supply decreases. With this system, after the Bitcoin reward halving every 4 years, the internal value of Bitcoin is free from inflationary effects.