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Crypto is down. Wrong. Bitcoin is at its lowest price in 18 months and the resulting headlines are dramatic. And yet, in the face of the crypto crash, all hope is not lost. Despite Bitcoin’s decline in value, it remains to be seen how much the broader economic landscape affects the coin’s long-term adoption.
Why? Because bitcoin’s use cases are multiplying in the context of global inflation. Beyond valuation, Bitcoin finds new utility in this moment of market madness. Crypto’s largest and oldest coin holds promise on multiple fronts — from governments exploring it in international trade to investors seeking a digital store of value. Let’s see why inflation — not the crypto market crash — will define Bitcoin for years to come.
Bitcoin as a store of value
With inflation hitting 8% in the United States, investors are desperate for a store of value – an asset that can hold its value over time without depreciating. In the past, gold has been the proven bet against inflation. This time around, $10 billion has been withdrawn from gold funds as investors increasingly turn to a new alternative: Bitcoin.
And why not? Like gold, Bitcoin is scarce and has a finite supply. Citing Bitcoin’s $700 billion market capitalization, compared to some $2.6 trillion in gold held as an investment, Goldman Sachs said in January that the cryptocurrency currently holds a 20% share of the market. store of value market.
It is important to note that greater market maturity is needed before Bitcoin is fully embraced as a store of value. A mature market has long-term investors who can afford to withstand price declines. Similarly, a mature market like gold relies on common frameworks, measurements, and classifications for all market participants. This year’s cryptocurrency volatility does not yet reflect a mature market.
Despite the coin’s growing correlation with the Nasdaq and other risky assets, Bitcoin is still a mechanically deflationary currency designed to retain its value over the long term. Much like the dotcom bubble at the turn of the century, today’s wild ups and downs can be somewhat attributed to the hype and financialization of a revolutionary trend in its infancy.
As digital assets gain wider adoption, expect to see institutional investors and crypto-specific funds act as stabilizing forces in the market. This will bring much-needed maturity and potentially more buyers who see Bitcoin as a store of value.
Bitcoin in international trade and settlement
Speed, efficiency, risk: there are many reasons why cross-border digital payment is also being explored in these times of high inflation. For example, the Bank for International Settlements (BIS) recently developed prototypes for a common digital currency platform. Dubbed “Project Dunbar,” the development proves that financial institutions could use central bank digital currencies to transact directly with each other on a shared platform. The problem for the banks, however, is that the realization of such a project remains years away.
Earlier this year, the World Economic Forum highlighted the benefits of digital currencies in global commerce. They include speed – reducing payment settlement time from days to minutes – as well as alternative credit – using a public blockchain ledger to share financial history and take out loans for import and export. Being by far the most popular cryptocurrency, Bitcoin is well positioned to spearhead the introduction of digital cash into the financial ecosystem.
We are already starting to see this happen. Following the sanctions imposed this year by the international community, Russia considered accepting Bitcoin as a means of payment for its oil and gas exports from “friendly” countries. Despite the country’s obvious desperation to circumvent the sanctions, the move would set a precedent in international trade and, again, lead to further Bitcoin adoption. This effort to “de-dollarize” trade could also see Bitcoin’s volatility begin to subside as more such transactions are made in the digital currency.
Bitcoin in developing economies
Unfortunately, the majority of the world shares today’s economic pain. Inflation erodes the purchasing power of currencies other than the dollar, which has a particularly harsh impact on developing countries. From the Turkish lira to the Nigerian naira, inflation is punishing local currencies in the midst of a post-pandemic recovery. Here, economic uncertainty and instability lead to greater Bitcoin adoption.
In Turkey, its national currency crashed against the dollar in the last quarter of 2021. As a result, cryptocurrency transaction volumes using the lira surged to an average of $1.8 billion per day. on three scholarships. In Nigeria, meanwhile, a similar history of currency devaluations and tight foreign exchange access controls has led to more Bitcoin. Likewise in Russia.
Increasingly, Bitcoin is emerging as more than a store of value for people – it’s a hedge against hyperinflation. It remains to be seen where this will go. With growth, there could be community pushes that lead to more nationwide cryptocurrency adoptions, such as in El Salvador.
Whatever happens next, it’s clear that the conversations and outlook around Bitcoin are changing with inflation. From investors experimenting with crypto as a store of value, to international banks and governments leveraging it in commerce, to populations trying to protect their purchasing power, we are entering a new phase of change. ‘adoption.
Coincidentally, increased adoption is happening at the same time as increased scalability. For years, Bitcoin has been held back by its relatively long transaction times. Recently, however, scalability has become less of an obstacle thanks to developments such as The Lightning Network and its fast transactions between participating nodes. This is essential if Bitcoin is to take the position of functional currency in international trade and societal currency. Watch this place.
Chen Li is CEO and Founder of Digital Asset VC at Youbi Capital.
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Why Inflation – Not The Crypto Crash – Will Define Bitcoin
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