Bitcoin is the ultimate inflation hedge, here’s why
Inflation has been a recurrent topic throughout the year, and sadly, it won’t be going away soon. However, different actors are spreading misinformation about it, trying to protect their interests. Here’s what’s true — and what’s not — about what they are saying about inflation.
The basics: What is inflation?
Simply put, inflation is the continuous and steady rise of prices for goods and services. Another way to look at it is the decline of a given currency’s purchasing power over time. In any case, it means that you can acquire less now with the same amount of money you had before.
This financial phenomenon affects every household’s economy as it raises the cost of living for the ordinary citizen. However, as prices rise, consumption decreases, slowing down the economy. Thus, prolonged inflation can have severe consequences for the economy in the medium to long term.
Although it can respond to other factors, the causes for inflation are almost always monetary, which means that the available money supply determines it. Classical economic laws of supply and demand help better understand this: When there’s an ample supply of any good or asset, its value decreases as it is easier to acquire. Contrarily, when supply is low, it becomes scarce or harder to obtain, making it appreciate.
Money is no exception to these laws, so when money supply grows and more of it enters the market, its value against other goods, services, and assets decreases. So it’s not that things become more expensive, it’s that the money we use to buy them is worth less.
Who pays for inflation?
Inflation isn’t a fair game for one simple reason: money issuance is centralized. A currency’s respective financial institution concentrates all decision-making power. Whether the Fed for the US dollar, the European Central Bank (ECB) for the Euro, or the Bank of England (BoE) for the British pound sterling, these institutions call the shots regarding money supply. Of course, they know this, so they take advantage of it.
You may remember this controversial interview with Minneapolis’ Fed President, Neel Kashkari, claiming that “there’s an infinite amount of cash in the Federal Reserve.” Obviously, we all know there’s no such thing as infinite money — we wouldn’t have poverty or hunger if there was. So the question arises: Who finances money printing?
The answer is you, the average tax-payer citizen, through liquidation of both your salary and your savings. Let us explain with a hypothetical example: Imagine you have $100 in your bank account, and the total money supply is $1 million. That means you have 1/10,000 of the total money supply. Let’s also say the government has contracted another $1 million in debt. They don’t have enough to pay it, so they print another $1 million to do so. The total money supply is now $2 million, and you, who have been responsible and saved, now have 1/20,000 of the total supply. The Fed has cut the value of your savings — and everyone else’s — in half unilaterally to pay a debt that you had nothing to do with. And you’re still paying taxes.
Central banks love printing money because it’s the easy way to finance their agenda without paying or even taking responsibility for it. After all, they’ve got you to do that for them. And not only that, but they’re also fully entitled to do so. It’s all 100% legal! Now, you might think the system is broken, but it’s not. Financial institutions designed the fiat standard like this, so they have complete control with zero consequences.
Furthermore, and although that example was a hypothetical situation, the reality is not far from it. Take a look at the charts below.
M1 (money in circulation) and M2 (M1 plus bank deposits) have skyrocketed in 2020 during the covid-19 pandemic. Available money in the market surged almost 400%, and around ~25% of the entire stock was printed last year alone. Now, take a look at the most recent inflation rates..
The correlation between one and the other is evident. Government officials respond that this situation is only temporary due to the pandemic, and it will soon drift back to normal. However, data shows that unless money issuance stops immediately — it may even be necessary to reduce the supply — , that is hardly happening.
The catastrophic consequences of sustained inflation
Once taking the red pill regarding inflation, it takes outstanding effort to ignore the dire course we’re accelerating through. However, the gradual effects this phenomenon has on the macroeconomy of a country are easily missed for the average citizen focused on their day-to-day routine.
Nonetheless, in the long term, sustained inflation is often devastating both for national and household economies. In the financial world, that’s called stagflation — economic stagnation accompanied by a constant increase in prices — and it is one of the worst situations a country’s economy can experience. It takes only a glance at Venezuela or Argentina — countries that rely heavily on money printing — to see how poverty rises at the same time that salaries’ purchasing power can’t find their bottom.
The middle class tends to be the most affected by this, as workers rely on their salaries and hope to accumulate savings over time for a decent pension or emergency fund. This phenomenon renders all those efforts useless, as the increase of money supply cuts the value of those savings with each passing month. Like Lewis E. Lehrman puts it, “Middle-income professionals and workers, on salaries and wages, and those on fixed incomes and pensions, are impoverished by the very same inflationary process that subsidizes speculators and bankers. Those on fixed incomes will likely earn very little or even a negative return on their savings.” In turn, this also leads to unemployment and poverty. Here’s when inflation’s consequences start catching up with macroeconomic indexes.
Even if you feel unaffected by inflation today, or if you just notice it on a twenty-cent increase in the price of a carton of milk, you should consider your options for protecting your savings for the long run. But what are your options? Returning to the gold standard is impossible due to gold’s impracticalities on a global scale: it’s indivisible, cumbersome to move, and unscalable.
The other option is to take control of your money and enter a fair, democratic system specially designed for efficiency and with a clear, immutable monetary policy: Bitcoin.
Opt out, embrace Bitcoin
As we’ve explained, central banks and financial institutions make the rules, so as long as you use their money, it’s game over. The Fed has complete control over the dollar, the ECB over the euro, and the BoE over the British pound sterling. The same goes for all fiat currencies and their respective issuing institution. But there’s an alternative.
Bitcoin has no issuing institution. No authority calls the shots. The issuance rules are written in its code, and nobody can change them, and so is its total supply. That’s why we say Bitcoin is decentralized. There’s 21 million BTC. That’s all there will ever be.
If fiat is their money, Bitcoin is yours. Being independent of financial institutions, it gives you your economic sovereignty back and sets you free from the decisions of central bankers and monetary policymakers. When you use Bitcoin, reckless money printing even favors you, as it helps appreciate your crypto-assets.
Not only that, but Bitcoin is also the pinnacle of worldwide financial inclusion. Anyone with an internet connection can access it, and everyone who does is the same as everyone else. There are no privileges nor preferences and no bail-outs. Every single user has to abide by the same rules.
Final considerations
When the arguments expressed here become clear, It’s easier to understand the bigger picture. You can see why the most authoritarian governments worldwide are trying to ban Bitcoin, and the freest, who value personal freedom, are embracing it.
Bitcoin is the people’s money, one that nobody regulates and has fixed, democratic laws. It is the ultimate tool to regain your financial sovereignty and protect your savings against inflation and devaluation.
Moreover, Bitcoin completely erases the need for any financial institutions whatsoever, as it provides practical, secure ways to store your savings without relying on third parties. If fiat money was a necessary evil before, thanks to Bitcoin, now it’s just evil.
