Will Inflation and the Taproot Update Be the Fuel to Bitcoin’s Rocket?

Having just smashed past the $66k mark in October, the undisputed King of Crypto looks set to continue its incredible run, as several macro factors are lining up to add fuel to the Bitcoin rocket.  

Bitcoin as the Ultimate Inflation Hedge?

The concept of hyperinflation has been trending in the crypto space of late, with billionaires such as Paul Tudor Jones and Jack Dorsey touting Bitcoin as a better hedge than gold. With the consumer price index (CPI) in the U.S. up by 5.38% from last year, the fear of hyperinflation is mounting in the market. 

To combat rising inflation rates, and to increase the velocity of money during the pandemic, the U.S. Federal Reserve increased the M2 money supply by 10.7% from last year. Too much of anything can be bad, and too much money in the system reduces the strength of the greenback. 

Naturally, investors are turning to other more profitable assets (e.g., Bitcoin) that can hedge against the weakening U.S. dollar. Indeed, the price of the BTC/USD pair has been moving in tandem with the treasury yield, indicating a positive correlation between the real inflation rate and the price of Bitcoin

That said, could Bitcoin really displace age-old gold and become the ultimate inflation hedge? Bitcoin was created with a finite supply, great for inflationary hedging. In addition, more than 90% of Bitcoin has already been mined, increasing its scarcity and hence, its value. That is not all: The Bitcoin network looks set to be bolstered further in their functional capacities by the upcoming Taproot upgrade. With all these in the pipeline, these are exciting times for BTC indeed.

Taproot Will Push Bitcoin to Greater Heights

The much anticipated (but underreported) Taproot upgrade will swap out the current Elliptic Curve Digital Signature Algorithm (ECDSA) signature scheme for the more lightweight Schnorr signature scheme, considerably improving the Bitcoin Network’s ability to scale. Because of this, some are even discussing the possibility of Bitcoin smart contracts and Bitcoin-powered decentralized finance (DeFi) projects in the near future! Moreover, Taproot will potentially help scale several related Layer 2 protocols to the benefit of the Bitcoin network. 

The Lightning Network, for instance, will further improve Bitcoin’s efficiency and privacy with the integration of Schnorr signatures by computing transactions off-chain. This new feature will increase the speed of processing transactions and decrease supply-side pressure, leading to reduced transaction fees. 

And there’s more: DeFi projects will experience a spike in institutional activities on the back of the potential for smart contracts on the Bitcoin network. In fact, Bitcoin has already seen large amounts of institutional inflow amounting to $70 million in the weeks leading to the upgrade. Will Bitcoin transform from a digital currency vault to becoming the enabler of decentralized applications (dApps)? Only time will tell.

Effects of Taproot notwithstanding, previous network upgrades have also traditionally sent the price of BTC soaring. For example, BTC pumped by 50.6% within a month of the SegWit update in 2017. If the market is  to rhyme with its historical price movements, BTC may just be en route to a whopping $100k by the end of the year.

Increase in number of accumulation addresses prior to and after the SegWit update

Bitcoin to Transcend From Digital Gold to Global Currency

Bitcoin’s greatest two-word narrative is inflation hedge. The stock-to-flow model, commonly used for valuing the intrinsic value of Bitcoin, suggests that the price of BTC is currently worth $106k. While gold has held up across centuries and cultures, Bitcoin is transcending its role as a digital vault of value, enabling global adoption with every update. 

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