How does Bitcoin play its role in inflation in the USA?

Bitcoin was introduced in 2009 by an anonymous founder named Satoshi Nakamoto, and it has gained immense popularity since its inception. Bitcoins are stored in Bitcoin wallets which are basically like bank accounts. Blockchain technology gives bitcoins special features like decentralization, security, speed, and anonymity. 

As a result of bitcoin’s gains in the market, its prices have skyrocketed. Last year it was priced at just around $1000, but now it has reached an all-time high price of over $17,000 as of 14th December 2017. However, this has led to inflation in the USA, just like any other country. Currency derives its value through circulation, and when more dollars are printed, thus increasing the supply of dollars in the country without an equivalent increase in production of goods & services, prices will rise (inflation)

The US dollar is the primary currency used in the United States. It is generically called the “dollar.” The money supply of US dollars consists of Federal Reserve Notes and coins. Do you need to know what Federal Reserve notes and coins are for this?

Federal reserve notes. It turned out to be paper fiat currency initiated with $10,000,000 of new currency in the US. This money was printed by the federal reserve board of new york and traded to the treasury department for bonds at $11,00 per dollar, leading to 11 billion new dollars.

This kind of inflation is called seigniorage, referring to profits from creating currency (printing money). 

How does Bitcoin play its role in inflation in the USA?

Now understand how bitcoin has given rise to inflation in the USA. The monetary policies of the world are not explicitly targeted towards bitcoins. Still, since it has gained immense popularity, therefore following the laws of demand and supply, bitcoins have also risen to higher prices. This increase in prices is due to a sudden supply shortage because only a limited amount of bitcoins are available with miners worldwide.

As bitcoins are hoarded in wallets, few people are putting them up for sale. Therefore, it leads to huge demand, and due to this, an increase in prices has been observed. Also, since there is no centralized body behind bitcoin transactions, there is no proper monitoring of financial operations through bitcoins. Therefore, it has attracted people towards bitcoins, thus leading to a sharp increase in prices. Click here, thenewsspy.technology

More miners are entering in bitcoins to make more money, which has increased the demand for bitcoins again, leading to an increase in bitcoin price.

Supply deficit: 

As with fiat currency, Bitcoins can be mined by solving mathematical computations. However, the number of bitcoins generated per unit time is set to decrease as you move towards 21 million bitcoins in total. As of now, only around 16.8 million have been mined. It means that bitcoin mining operations will slow down, and prices will increase further due to the increased demand.

In simple words, if bitcoin is mined from the USA, then there will be a decrease in the supply of dollars, thus leading to inflation. But since only 16 million have been mined so far and considering that more miners are entering into bitcoin mining, we can see that its production rate is slowing down, which leads to a supply deficit and hence leads to an increase in prices.

As if now it is seen that bitcoin mining is on the rise, which means the number of bitcoins will be limited. Therefore, the supply of coins will decrease, thus giving rise to an increase in the price of bitcoins.

Conclusion:

In simple words, inflation is a rise in prices. Inflation occurs when the demand for money goes up and supply remains unchanged or doesn’t meet the demand. Here you can say that bitcoin price went up because of its limited supply, which means, as more miners enter it, there will be a huge deficit in bitcoin production. 

On the other hand, when it comes to fiat currency since there is no increase or decrease in the production of money, the same amount of dollars circulates within the market, leading to price stability. But in the case of bitcoins, their prices are on the rise because of deficit production. It is a kind of currency inflation.

Christophe Rude
Christophe Rude
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