With over 90% of all Bitcoin in circulation, the inflation rate of the asset has dropped significantly over the years, beating that of the US dollar by at least three times. This allows Bitcoin to act as a potential hedge against inflation and economic uncertainty. In practice, it does so, especially in the short term, with varying degrees of success.
The numbers at a glance
Bitcoin’s declining inflation stems from the set quantity of 21 million units. The price falls after every four years during the halving. According to facts From crypto analytics platform WooBull, Bitcoin’s inflation rate has steadily declined since its launch in 2009, and on March 5 stood at 1.8%.
At the same time, the annual inflation rate of the US dollar will be 6.4% in 2023. Inflation for the US dollar peaked at 7% in 2021, it shows facts from USInflationCalculator. This means that the inflation of the US dollar is about 3.56 times higher than that of Bitcoin.
The causes behind Bitcoin’s declining inflation
The fact that Bitcoin has low inflation is due to the deflation model of the assets. The concept implies that the rate of inflation decreases after events that lower inflation. Inflation is determined by the reward system for miners, which is halved with every halving. This means that the amount of Bitcoin produced by miners will also be halved. The next halving is expected to take place in March 2024.
At the moment, miners will receive 6.25 Bitcoin as a reward for producing a block, and after the March 2024 halving, that reward drops to 3.125 Bitcoin. This is the only way new Bitcoin comes into circulation, so that after every halving, the inflation rate of Bitcoin also halves.
In contrast, the inflation of the US dollar is expected to increase as the value of the currency decreases over time. This fall in value is mainly caused by the excessive printing of money and the declining purchasing power of each dollar. Inflation can be caused by several factors, such as an increase in the money supply, a decrease in demand, or a decrease in production.