Is Bitcoin Really A Hedge Against Inflation?

The main thesis that is promoted for why an individual should buy bitcoin is that the US government is insolvent, running record federal and trade deficits, and is going to create so much inflation such that they destroy the dollar’s purchasing power.

While it is true that the most likely scenario is that the dollar falls against other currencies and the cost of living rises significantly for US citizens over the next decade, can bitcoin really effectively protect you?

We know that the government is relying on the inflation tax to fund its operations, and if the market starts to adopt another form of money, then that money would increase in relative value against the dollar. But it is inevitable that either the US gov’t bans bitcoin or they adopt higher levels of direct taxation in response to this. I think it is more likely that the government will ban bitcoin because it’s easy for them to draft and enact legislation. The ultimate question is whether this legislation is effective or not.

It is possible that the value of bitcoin actually rises as the fed loses control over monetary policy and the US federal government bans all use of bitcoin in the white market. The reason why the value of bitcoin could go up in this scenario is that goods/services move into the black market in order to avoid taxation. As cryptocurrency becomes more private it reduces the risk for one to break the law such that many individuals are willing to take the risk of being imprisoned to avoid the tax.

The other factor that limits the number of goods that can be demanded in bitcoin is the fact that as demand increases for goods in BTC so does the cost of using BTC. This isn’t widely known among bitcoin speculators but does significantly effect its net present value. If one believes bitcoin can eventually gain 100% market share in the money market then it’s NPV is much higher than if one thinks that it’s monetization limit is only around 5% of the money market.

The other difference in bitcoin from monetary networks in the past is that there can be a nearly indistinguishable version in terms of monetary characteristics that can be created if there is enough demand. We can’t create a new gold or a new dollar, but the market can create a new bitcoin when fees make some transactiosn unfeasible to occur on BTC.