What increased money-printing means for digital currencies
Economies across the globe have been challenged like never before over the past year, adapting to find ways to remain optimistic and to meet the needs of citizens grappling with the effects of the COVID-19 pandemic.
The U.S. is at the forefront of this reality. Having navigated a world-leading number of COVID-19 cases and deaths, leaders are trying to find creative ways to support the economy as we await further rollout of vaccination efforts.
This financial support was a central component of President Biden’s campaign platform, as he made promises to stimulate the economy through numerous initiatives that included a sizeable impending relief package.
Here is what these promises could mean for the value of the U.S. dollar and the future of bitcoin and other digital currencies.
The proposed stimulus package
The first coronavirus relief bill was signed into law in March of 2020 to the tune of $2.2 trillion, as U.S. citizens saw the first round of government assistance make its way into their bank accounts. The result was a record-breaking pace of money-printing that had many predicting subsequent inflation and devaluation of the U.S. dollar.
With calls for further relief echoing throughout the rest of the year, President Biden made sure to focus on plans for a new wave of government aid while on the campaign trail, and has now taken steps to implement such a plan since his election. In January of 2021, Biden outlined a new, $1.9 trillion relief proposal that would once again set off a massive degree of money-printing.
Does money-printing cause inflation?
Money-printing is widely viewed as necessary in times of financial uncertainty as a means of helping incite more spending while increasing liquidity for the economy. It is, however, closely tied to its ability to lead to inflation – or even hyperinflation.
The U.S. Federal Reserve defines inflation as an increase in the price of goods and services over time. Many also associate inflation with a change in money supply or in the total amount of money in circulation.
The most noteworthy concern with inflation is that it devalues the U.S. dollar – but central banks still often welcome it, especially when in need of signs that the economy is and will pick back up. When money-printing increases and inflation becomes a key discussion, assets with a limited supply tend to increase in price, including stocks, real estate, and certain forms of cryptocurrency.
Cryptocurrency vs. inflation
The main reason cryptocurrency prices increase alongside increased money-printing is because many cryptocurrencies have a limited total supply.
In the case of bitcoin, only 21 million can ever be created. The block reward halves over time, which is designed to decrease the rate of issuance (the rate at which the supply of bitcoin can grow). Unlike the U.S. dollar, we cannot create as many bitcoin as we want, whenever we want.
While the U.S. dollar loses value over time, the deflationary nature of bitcoin means its buying power is designed to do the opposite. And bitcoin is just one of many forms of crypto with a limited supply and deflationary structure, which has led to digital assets being viewed as an increasingly strong hedge against the risks of inflation.
We have already seen the impact of this over the past several months, with many different forms of cryptocurrency experiencing record highs as money continues to be printed and investors continue to add digital assets to their portfolios.
Continued gravitation toward digital currencies
As further government support and money-printing are expected to occur in 2021, investors continue to move toward cryptocurrencies on both an individual and an institutional level. There are several key metrics that point to this increased adoption, including:
- The rise of Grayscale’s Bitcoin Trust (GBTC) premium to above 30%
- Millennial preference of bitcoin over gold as a safe-haven asset
- Record high prices for bitcoin, Ethereum, Zcash, and others
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