Bitcoin Can be a Hedge Against Inflation

Marvin Dumont  |


The late Milton Friedman blamed governments as the primary cause of inflation. The Nobel Prize-winning economist said that government spending is an institutionalized habit that eventually requires the state to print cash and cause inflation to pay for growing deficits.

Say you purchased $1,000 worth of goods 17 years ago. Today you'd need $1,461 (or $461 more) to buy the same amount of goods, according to U.S. Bureau of Labor Statistics.

Bitcoin is more than a fad; it's playing the economic role of digital gold. Just because Western media call bitcoin "Tulip Bubble 2.0" may not make it so.

Hedge Against Inflation

Around the world, there are millions of people who are trying to protect their savings in inflationary and/or mismanaged economies. (Think Greece and Cyprus.) Cryptocurrencies represent one medium for retaining — or increasing — purchasing power, especially for those who live in high-inflation environments that have a bleak outlook.

Governments often impose strict capital controls (such as China). A bitcoin wallet gives users 24/7 access to money. That's a privilege most Americans don't think about. In 2013, the central bank in Cyprus imposed a 100-euros daily withdrawal limit at ATMs. In Greece in 2015, it was 60 euros per day. Without access to funds, a pensioner's savings can quickly vanish. If you have a heart attack, you can die in the emergency room not able to pay the hospital while your inaccessible money is stored in a fledgling bank.

Until cryptocurrencies came along, citizens who lived in crisis-prone economies were financially trapped within their borders. If you're a farmer in Cuba, you just can't pack your bags and relocate your family to a promising jurisdiction. And if you live in North Korea or Iran, good luck trying to get a visa or passport.

Struggle For Economic Freedom

Wendy McElroy, author of "The Satoshi Revolution," describes the bitcoin movement as a struggle for political and economic freedom. "Hopeful people reach out to control their own lives because they glimpse freedom or greater prosperity which are two sides of one coin." She adds, "bitcoin does not directly confront governments or corrupt institutions; it sidesteps and obsoletes them."

With bitcoin, all you need is an internet connection to transact, or to store the currency. Acquiring the world's most popular cryptocurrency is often necessary to fight against eroding purchasing power, where buying a car can cost 100,000 Venezuelan bolivars one moment, and cost twice as much a few weeks later.

Venezuela's inflation rate is over 650 percent in 2017 and the International Monetary Fund (IMF) predicts it could rise to 2,300 percent next year. That means in 2018, Venezuelans could shell out 23 times more bolivars to buy the same amount of goods. In Libya, inflation is at 32 percent. Angola: 30.9 percent. Argentina: nearly 27 percent. And Zimbabwe's inflation rate may be too massive for many Americans to understand.

What's the scale of the problem? Venezuela has a population of nearly 32 million, while Zimbabwe has over 16 million. Moreover, two billion people around the world have no bank account whatsoever, according to World Bank.

If you're a merchant in Kenya, the nearest bank may be across a desert. But if you can get wi-fi signal, you can collect or send payments in bitcoin or other cryptos.

An Upgrade Over Fiat Cash

"In the past, governments outlawed private money," says economist Jeffrey Tucker, founder of Foundation for Economic Education (FEE). "But there is a difference this time. Bitcoin lives on a distributed ledger. It is pure math, and its platform is global and immutable. Governments can no more outlaw bitcoin than they can outlaw algebra."

At dining tables across the country, most Americans may feel comfortable with their stable dollar. The U.S. inflation rate has averaged only 3.22 percent from 1913 to 2013, according to InflationData.com. But at that rate, Americans' purchasing power actually gets cut in half roughly every 20 years. In the past five decades, the dollar has lost nearly three-fourths of its value.

Even if you reside in a Western democracy, fiat cash can still be problematic. A study of 775 fiat currencies by DollarDaze.org found that 20 percent of fiats failed through hyperinflation. Moreover, 21 percent were destroyed by war; 12 percent were destroyed by independence; 24 percent were reformed, and 23% are still in circulation.

The average life expectancy of a fiat currency is 27 years, the study found.

"Bitcoin is a vastly better technology than prevailing national money," says economist Jeffrey Tucker. "With money, we’ve had no improvement in 100 years. Bitcoin is a massive upgrade…. It's more inclusive. It’s cheaper and faster. It’s dealing in final payment settlements rather than the consumer constantly carrying around counterparty risk."

Tucker adds, "It fixes so many things that are wrong with national money — things we didn’t even know were wrong until bitcoin came along."

A Borderless Currency

Bitcoin may never be officially recognized as a global currency reserve like the U.S. dollar, British pound or Chinese yuan, but more people are choosing it as the world's first digital and borderless currency — with or without IMF approval. People are freely voting with their digital wallets, except in places like China that have outright banned bitcoin exchanges.

Bitcoin's rise is a decentralized uprising against central banks, government finance ministries and their printing presses. Other countries could follow China's lead and ban bitcoin and other cryptocurrencies — and/or create their own centrally-controlled cryptos that may resemble digital versions of inflationary fiat notes that are debased over time.

Thus far, bitcoin has been a good hedge against inflation. Bitcoin's maximum supply of 21 million units means that the digital cash is deflationary. Coins are lost all the time, and for reasons such as lost passwords, stolen devices, hacks and shutdown websites. Digital forensics firm Chainalysis estimates that 17 to 23 percent of existing bitcoins are gone forever. Lost bitcoins can be viewed as a gift to everyone else in that the missing coins reduce supply and can therefore increase bitcoin's price.

Bitcoin is a store of value and perhaps a way to climb out of economic abyss.

DISCLOSURE: The views and opinions expressed in this article belong solely to the author. Information contained herein do not constitute professional or investment advice. The author holds no commercial interest or financial position in organizations mentioned in this article.


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