In recent years, there has been a sharp increase in global inflation rates. The Covid pandemic followed by the War in Ukraine dealt a heavy blow to the global economy. In some cases, the situation was made even worse because of political decisions made by local governments. The problem is very serious, but it looks like some third-world countries have found the solution – in order to beat inflation, they have decided to embrace Bitcoin.
Why Is Inflation a Problem?
Inflation is a problem because it seriously erodes the value of a currency. For example, if the inflation rate is 10%, it means that the purchasing power of a dollar is reduced by 10% in a year. In other words, inflation eats away 10% of your life savings!
There are many reasons why Inflation exists, and global events like the Covid pandemic can seriously contribute to the rising inflation rate. However, inflation always has a single major source: increasing the money supply.
The prices go up when the money supply grows faster than the economy. In other words, the main cause of inflation is the government printing too much money.
Unfortunately, all traditional fiat currencies like the dollar or euro are susceptible to inflation. Even developed economies like the United States and the European Union are now having serious problems with inflation. However, the situation is even worse in third-world countries, where even a small increase in inflation can lead to a huge decrease in the standard of living. That’s why so many third-world countries are looking to solve the inflation problem with Bitcoin.
Why Is Bitcoin Immune to Inflation?
Fiat currencies like dollars and euros have an unlimited supply. The governments are always printing more and more money, which in the long term always causes inflation to rise and causes the prices of everyday goods to increase.
Bitcoin is different. It’s a next-generation digital currency that is fully decentralized, which means that it is not under the control of any government, central bank, or other financial institution. This means that Bitcoin cannot be affected by policies that cause the value of traditional currencies like the dollar or euro to decrease.
Specifically, Bitcoin is immune to inflation because it has a fixed total supply of 21,000,000 BTC. New bitcoins are still being mined and added to the market because this limit has not yet been reached, but after that happens and there are 21,000,000 bitcoins in circulation, nobody in the world will be able to mine more bitcoin.
Bitcoin is so good at combating inflation because it cannot be ruined by bad policies. Nobody can increase the supply, which means that as the demand grows, the price of Bitcoin increases.
Of course, Bitcoin has other advantages as well. Because of the fact that blockchain technology is based on advanced cryptographic algorithms, Bitcoin transactions are extremely secure. But the main reason why third-world countries are so eager to embrace Bitcoin is simply that it can empower people in developing economies by protecting them from inflation.
Why Are Third World Countries Embracing Bitcoin?
Bitcoin has been used by people living in countries that experience high levels of inflation for quite some time. A great example of this is Venezuela. This country experienced inflation so high that the local currency was devalued to the point where it has become almost totally worthless.
To put it simply, Bitcoin has already proved its value in third-world countries. Many of these countries have been struggling for a long time with the same economic problems that are now only starting to trouble Europe and the United States. Because of that, developing countries are now leading in Bitcoin adoption and showing the way to countries that have only recently become concerned with inflation.
Fast transactions, low fees, high privacy, and being immune to inflation are the main reasons why Bitcoin became so massively popular among people living in third-world countries. On top of that, the convenience of purchasing bitcoin via a crypto exchange is facilitating the whole process.
But Bitcoin is not just being embraced by the people – the governments of developing countries are now also embracing BTC.
Which countries have adopted Bitcoin as legal tender, and how have they done it?
In September 2021, El Salvador became the first country to adopt Bitcoin as a legal tender. Not only have the citizens of El Salvador gained a powerful tool against inflation, but the country also became internationally famous and attracted major corporations to invest in such a technologically progressive nation.
For instance: Davivienda (a Columbian bank that highly promotes solar energy) alone has brought more than 201000 people into the formal financial sector through the expansion of digital services, and signed a new loan portfolio guarantee agreement with the U.S. Agency for International Development (USAID), and provided more than $100 million in low-cost housing and small business loans.
Nowadays, El Salvador is currently leading the way and promoting the use of Bitcoin to other third-world governments. In May 2021, El Salvador has hosted an international conference where Bitcoin and blockchain technology were discussed among representatives of many developing economies, such as Kenya, Senegal, Nigeria, Namibia, the Democratic Republic of Congo, Uganda, Angola, Burundi, Haiti, Dominican Republic, Bangladesh, Nepal, Ecuador, Costa Rica, Honduras, Mauritania and many more.
The second country to adopt Bitcoin as legal tender is the Central African Republic (CAR). The CAR is rich in natural resources like gold and diamond and has a $2.3 billion sized economy. Yet, financial inclusion is pretty low and they rely on remittances. Apart from embracing Bitcoin, the country also revealed that 20% of its treasury will hold a digital currency that will reflect the health of natural resources in the country.
As inflation keeps rising, Bitcoin is becoming more and more popular, especially in third-world countries. It’s not difficult to see why – because of its strictly limited total supply. Some might say that Bitcoin could be immune to inflation since the community participants can raise their hands against the inflationary consensus. In this way, we can see why one might say that Bitcoin is a true and meaningful hedge against inflation.