Following the news recently? you'll know that one of the headlines is record-breaking inflation, with each month delivering a more startling spike in costs. But where do cryptocurrencies like Bitcoin fit into this narrative?

Some investors see certain cryptocurrencies as a hedge against inflation, similar to gold. Others see cryptocurrencies as riskier assets, whose price volatility makes them unappealing in difficult economic times.

Below explain the relationship between Bitcoin and inflation.

What is inflation?

Inflation is a measure of how quickly the prices of goods and services rise.

Inflation affects all goods and services, including utilities, automobiles, food, health care, and housing. The effects of inflation in an economy have an impact on both individual consumers and businesses since it reduces the purchasing power of money.

As inflation continues, it takes more and more units of currency to acquire the same amount of products and services. In short, inflation diminishes the value of savings and delays retirement.

The two general signs of inflation are a rise in the price of consumer goods and a slow drop in the value of currencies.

What is the relationship between Bitcoin and inflation?

Bitcoin is the largest cryptocurrency and arguably the most well-known.

Although the crypto market's economics are complicated, some cryptocurrencies, like Bitcoin, are designed to either resist inflation or have predictable, low inflation rates. By staying up to date on Bitcoin news across the world, investors can predict whether the Bitcoin market will be bullish or bearish over time.

Bitcoin, which is often seen as ‘inflation-resistant’ experience inflation as more of it is mined. However, because mining for new Bitcoin is automatically decreased by 50% every four years, inflation rates are also bound to decrease eventually.

Cryptocurrency has become increasingly aligned with general market movements. This means that when the market goes down, Bitcoin price likely goes down as well.

Whenever the news of inflation strikes, the federal reserve will enact a dual mandate. Policy interest rates will go up, and there will be monetary tightening. As a result, assets like Bitcoin will see a price decline.

Is Bitcoin a good inflation hedge?

Before we get into this, here is a quick explanation of what an inflation hedge mean.

An inflation hedge is an investment intended to protect investors from the decreased purchasing power of money due inflation. Investing in an inflation hedge means investing in an asset you expect to maintain or increase in value over time, considering the impacts of inflation. It could also mean investing in an asset whose value is predicted to decline more slowly than the currency’s value.

While gold has long been considered the go-to hedge against inflation, cryptocurrencies like Bitcoin also provide great alternatives.

Rather than being "inflation-proof," which suggests complete impenetrability against any external changes, Bitcoin is more of an "inflation-resistant" asset.

Bitcoin, as the largest and most established cryptocurrency, is widely regarded as a solid inflation hedge. It could even be seen as a better hedge than gold. Despite being more volatile than gold, bitcoin has better long-term growth potential and, as a result, protects against inflation.

One of the keys to making an asset resistant to inflation is scarcity. Because Bitcoin has a limited supply, it remains scarce, thereby ensuring that its value will remain steady over time, which is the reason why it is dubbed "digital gold."

Bitcoin and other cryptocurrencies have been touted as a hedge or safeguard against inflation. But in recent years, bitcoin has begun to move in conjunction with other major asset classes such as stocks. When central banks and governments take steps to curb inflation, most assets are affected and lose value, and numerous cryptocurrencies have recently been no exception.

Some cryptocurrencies, such as Bitcoin, have characteristics that make them more resistant to inflation in the long run. These characteristics include; scarcity, simplicity of transfer, and immunity from direct government interference.

Cryptocurrencies can diversify your financial portfolio, but it's vital to avoid owning too much of any particular asset class.