Inflation and Bitcoin Economics Explained

Inflation affects us all, some disproportionately more than others. The biggest groups negatively affected are the middle class and individuals who earn a fixed salary. This is due to the fact that the value of our currency decreases over time as the central bank prints more money to pay for unexpected events such as the Covid-19 pandemic or to fund a war. This growth in the money supply (and decrease in the buying power of the currency) is called inflation. As a result, the currency will lose value, prices will increase and our money will buy us fewer goods and services as before. Today, all of the major fiat currencies are inflationary in nature, and all the assumptions economists make about macroeconomic models are based on an inflationary model.

The reason why Bitcoin is so appealing. Many people see it as a hedge against inflation is there is no central bank constantly issuing new money and controlling monetary policy. Instead, there’s an algorithm that mints and distributes Bitcoin to loyal miners in an event known as a “Bitcoin Halving”. The maximum supply of Bitcoin is capped at 21 million coins. This means that Bitcoin is deflationary as when all the Bitcoins are mined and distributed, there will never be any new Bitcoins. Deflation is the opposite of inflation and encourages holders of a currency not to spend their money. The reason is simple, if you think your money will be worth more next year than it is worth today, you will be less likely to spend it. Furthermore, just like gold, any bitcoins that are lost are removed from the supply, meaning the total supply will decrease or deflate over time. As a result, bitcoin will become increasingly scarce and valuable.

A large and costly mistake that I see amongst young people is putting all of their money into “high interest” savings accounts. Everyone says that you should “save” money, but you should actually be investing it instead. This is because the interest on these accounts are extremely low, at around 0.5% — 1%. The average inflation rate in Canada and the US is around 2% — 3% per year. That means that every year, you will be losing money just by holding cash. Technically you own the same amount number wise, but your real value decreases because of inflation. This is why it is crucial to invest as soon as possible. I personally put around 10% of my networth into Bitcoin as a long term hold against currency inflation (kind of like people who buy gold to protect their buying power against inflation) and the rest(~90%) I put into stocks that I see performing well in the long term.

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tw: @jonathan_chao // Investor and reader

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