How to beat inflation with Bitcoin
What is inflation?
If you don’t touch your bank account for a year, the balance won’t decrease. So far, so good. But here’s the thing: It’s worth less than when you paid it in. For this unwelcome phenomenon you can thank inflation.
Most countries in the world use "fiat" currencies. That means a currency whose value is guaranteed only by the ongoing existence of the government that issues it. Governments are free to print as much of their own currency as they want. In times of crisis, like the ongoing pandemic, trillions of dollars are printed at a time. While this has its uses, every new note printed decreases the value of those that already exist. In short, this means that consumers are able to buy less, even though they haven’t spent anything.
But how do we know that consumers can buy less? The effects of inflation are normally worked out via the purchasing power of a currency. In other words, what a fixed amount of currency can buy over time. This is calculated by tracking the average price of a basket of selected goods and services over time. If prices are found to have gone up in that period, the currency then buys less.
Most countries in the world use fiat currencies, such as Euros or Dollars. This means that an enormous amount of power passes through the hands of governments and central banks. In theory, they alone are free to impose financial rules on their economies. In the cryptocurrency world this structuring is known as centralization.
What about cryptocurrency?
Some economists think that inflation is good. This is because they believe a rise in prices is a signal for a wider demand for money. Others say it encourages spending. In cryptocurrency circles, inflation is generally considered bad news and symptomatic of a financial system that isn’t fit for purpose.
Bitcoin, along with many other prominent cryptocurrencies, were designed to feature something called a hard cap. While this does mean that new Bitcoin is constantly entering the supply, the hard cap seeks to ensure that Bitcoin’s inflation rate will one day shrink to zero.
Bitcoin’s so-called digital scarcity is a direct challenge to the way that central banks print billions of dollars each year, just to keep their economies afloat. For perspective, the U.S. Federal Reserve printed over $9 trillion of new dollars in 2020 alone!
The hard cap on Bitcoin means that, as demand grows, supply will decrease. The latest Bitcoin bull run has been spurred largely by institutional investors buying up huge quantities of Bitcoin due to the depreciation of currency value. The result? Less Bitcoin is available on the markets, meaning the prices shoot up and those lucky enough to already be holding Bitcoin long-term see their wealth soar.
Bitcoin’s Anti-Inflation Crusade Pays Off
Bitcoin is an extremely versatile asset. For some, crypto is used as a currency and method of payment. For a rapidly growing percentage of investors, Bitcoin is a safe store of value against inflation. While older savers are experiencing negative interest rates and a dip in the purchasing power of their funds saved in fiat currencies, the same can’t be said for millennials, a generation that already prefers investing cryptocurrencies over traditional assets like gold.
Only a few years ago JPMorgan Chase CEO Jamie Dimon called Bitcoin a “fraud.” But now, JPMorgan Chase is singing to a different tune. Because of Bitcoin’s inflation-busting properties and growing reputation as a store of value, analysts now see Bitcoin rising to a theoretical price of $146,000 long-term. They also opened a dedicated blockchain and crypto department. One thing’s for certain, as the world’s top hedge fund managers allocate ever greater percentages of their portfolio to Bitcoin, the secret of cryptocurrency’s true value is well and truly out.
Inflation and COVID: Don’t leave the protection of your savings to chance
Some economists have warned that inflation could return as the world comes to terms with the coronavirus financial crisis. Poor preparation for black swan events like COVID-19 has shown that the short-term thinking of elected officials is not only ineffective, but also counterintuitive to the interests of the citizens they are supposed to serve.
Risk-conscious investors should pay close attention to a number of factors that could signal a rise in inflation as the world takes on the economic cost of coronavirus. Despite the huge amount of in 2020, demand for money hasn’t surged, increasing the risk of excess currency. The vaccine could also play a role in inflation, speeding up societies reopening and triggering a spending spree on products and services, thereby driving up prices. If that wasn’t enough, the Federal Reserve announced it would deliberately seek to overshoot its 2% inflation rate.
A combination of life in lockdown and the general helplessness of making any impact on the outside world during the coronavirus pandemic has immersed most people beneath a tidal wave of apathy. While efforts to fight the virus are best left to the experts, there has never been a better time to protect your savings and improve your financial future.