Bitcoin is supposedly deflationary.. Yet it has lost more than 50% of its value in the last 6 months.
With high inflation, it’s proving to be a bad hedge against inflation. The whole point of bitcoin has been invalidated.
Bitcoin is fundamentally a deflationary currency and theoretically it should be a great hedge against inflation.
The opposite, what is an Inflationary currency?
Indian Rupee or the US Dollar, both are fundamentally inflationary in nature. The Central banks of the respective countries can print more of the currency, which makes the currency less and less rare as the banks print and put more currency in the money supply. Hence the value of such currency reduces over time.
To avoid this, bitcoin was made more like Gold, limited in supply. Governments, even if they want, can’t produce more bitcoin.
Deflationary token model
Every crypto currency is run using one of the 9 known token economic models. Bitcoin has a deflationary token model, meaning.. there is a hard cap on the number of tokens that can be created which acts as a deflationary mechanism. As the demand increases over time, the supply does not.
Bitcoin has a hard cap at 21 million. Once there’s 21 million bitcoins in circulation in the system, no more bitcoins will be generated. 16.9 million Bitcoins have already been mined.
What’s concerning about deflationary token models?
There is no history of deflationary currency systems whatsoever and hence we have no experience with how Bitcoin economics will work once the bitcoin supply reaches 21 million coins.
The system is designed to reward early adopters, meaning.. each bitcoin will be valued higher with each passing day. Which raises an important question for investors and currency holders, when do we start spending it? Should we hold it and spend it when the value rises or should we spend it right away.
This exposes bitcoin to unpredictable and high price volatility.
How are new bitcoins generated?
They are mined or earned..
Every time a transaction takes place in bitcoin. Say someone pays another party for a service using bitcoin, for this transaction to go through, it needs to be validated by a miner. When the transaction is validated, the miner is rewarded with a certain amount of bitcoin for their efforts and cost put into the validation process. This mining process takes a lot of computing power.
Once 21 million coins are generated and under circulation, miners will no longer receive rewards in the form of new coins.
Why is it losing its value?
Investor sentiment — Amidst fear in the market, everything is losing value.
Terra Luna another reputed crypto currency lost 100% of its value in a matter of days.
High Volatility — In the current environment, it seems investors would rather prefer asset classes that can be relied upon and are less volatile.