As an analyst with a background in economics and experience living through high inflation periods, I can’t help but agree with Neil Bergquist’s perspective on the downsides of holding fiat currency during inflationary times. Inflation erodes the value of cash savings, making it increasingly difficult for individuals to maintain their purchasing power over time.
In recent times, inflation levels reaching forty-year highs have significantly reduced the buying capacity of consumers’ income. This diminished power has led to the depreciation of cash savings and highlighted the potential risks of storing wealth as fiat currency.
According to Neil Bergquist, the co-founder and CEO of crypto exchange Coinme, the true expense of maintaining a standard of living, expressed in US dollars, is inflation. The purchasing power of your savings diminishes over time if you possess an inflationary asset such as fiat currency.
The Federal Reserve has been actively increasing interest rates in an attempt to curb persistent inflation. Currently, the federal funds rate lies between 5.25% and 5.5%. This upward trend is designed to cool down the economy and decrease inflation; however, inflation has proven resilient, refusing to decline to the forecasted levels predicted at the start of 2024. Instead, it hovers around 3.5%, significantly surpassing the Fed’s desired level of 2%.
Inflation has become a significant concern for investors in our current economic climate. As a result, they have been seeking out assets that can protect their wealth against price increases and a weakening US dollar. This trend has led to heightened interest in Bitcoin and other cryptocurrencies, making them attractive alternatives for storing value.
The Downsides of Fiat Currency in an Inflationary Environment
As a crypto investor, I’ve come to appreciate the distinction between digital currencies like Bitcoin with their fixed supply, and fiat currencies managed by central banks. Unlike Bitcoin, which is capped at 21 million units, there’s no limit to how many dollars (or other fiat currency) a central bank can print. This ability to create more money has an impact on its value.
When the US administration chooses to produce more dollars, as they frequently do, this leads to an increase in the total amount of dollars and subsequently decreases the worth of each existing dollar. In contrast, the cost of limited resources such as bitcoin tends to rise.
“He further notes that the maximum quantity of bitcoin in circulation will always be limited to 21 million. Unlike traditional currencies, bitcoin’s supply is capped and non-adjustable. No individual or authority has the power to introduce new policies leading to an increase in its availability. Even a political figure with innovative proposals cannot alter it. Its fixed supply is inherently embedded within the Bitcoin blockchain.”
As a researcher studying modern monetary systems, I have observed that most fiat currencies are set with an inflation target to stimulate economic growth through encouraging spending and investment instead of hoarding savings. However, the ongoing cycle of interest rate hikes indicates that consumers are experiencing firsthand the escalating costs of inflation that exceeds acceptable levels.
When inflation increases significantly, it erodes the value of both earnings and savings. Goods and services become more expensive, meaning that the same salary or income no longer holds the same purchasing power. In simpler terms, each dollar you have buys fewer goods and services than it did previously.
How Bitcoin Functions as a Store of Value
As a financial analyst, I would interpret this situation as follows: Given the current trend of fiat currency devaluation, it’s essential for investors to consider assets that have a limited supply. Bitcoin and similar digital currencies fall into this category. By holding these assets, investors may be better positioned to preserve the value of their wealth during times of monetary inflation.
As an analyst, I’ve observed that during inflationary periods, the value of real assets tends to increase. These assets encompass stocks, real estate, and items with a physical presence. Bitcoin has proven to be a real asset despite some skepticism due to its intangible nature. It is unique because no two bitcoins are identical, making each one an exclusive piece of property. Furthermore, you can exchange your bitcoin for US dollars at any time, given the substantial USD-BTC trading volume. This tangibility has been particularly evident during periods of hyperinflation.
Over the past decade and a half, Bitcoin’s value has significantly gone up, experiencing notable price hikes even during times of market instability.
Between 2021 and 2023, inflation experienced a significant uptick, peaking at 9.1% in the US during 2022. Simultaneously, bitcoin’s price saw a considerable rise – starting from approximately $32,000 in January 2021 and reaching $42,000 by December 2023. The digital currency’s value has continued to climb, majorly due to the introduction of crypto exchange-traded funds. As of July 2024, its price hovers around $60,000 – representing a nearly 50% increase year-over-year.
As a researcher studying historical market trends, I’ve observed that while prices do fluctuate, it’s not uncommon for the lowest point in a downturn to be higher than the preceding low.
The minimum cost of bitcoin in a particular year has always been greater than the previous year’s low. Despite its fluctuations, the trend shows an overall upward direction. Consequently, it’s advisable to avoid making hasty decisions influenced by daily or weekly volatility. Instead, consider adopting a long-term perspective and viewing bitcoin as a valuable asset for the future.
As a Bitcoin analyst, I would describe its volatility as most effectively contextualized by considering its long-term growth trajectory. During market downturns and periods of high inflation, Bitcoin’s limited supply offers advantages to its holders.
Where Bitcoin Could Go from Here
The fundamental difference between Bitcoin and conventional hedges such as gold lies in its technological foundation – a robust blockchain system – and its role as uncentralized digital currency. Unlike traditional hedges, which have a central issuing authority, Bitcoin is governed solely by the decentralized network of computers executing its code.
“According to Bergquist, Bitcoin represents a genuine digital currency that effectively addresses the issue of trust in our digitally advanced era,” or
Moving forward, if persistent high inflation continues to be a challenge, it could potentially draw in more investors toward less common assets such as Bitcoin. On the other hand, the integration of cryptocurrencies for transactions and business deals is progressing regardless of macroeconomic circumstances.
As a crypto investor, I can tell you that Coinme is a key player in the growing trend of making cryptocurrency more accessible to the general public. With their network of over 40,000 Bitcoin ATMs across the US, I can easily convert cash into my preferred digital currency or vice versa. Moreover, Coinme’s digital wallet offers an added convenience by allowing me to buy and sell crypto using a debit card.
“According to Bergquist, there are numerous user experience enhancements at Coinme enabling customers to interact with cryptocurrencies without having to grapple with the intricacies of blockchain technology.”
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2024-07-04 14:34