Inflation Is Destroying Our Lives! How To Protect Ourselves With Bitcoin?
Inflation, inflation, inflation - what can you do to preserve your purchasing power and capital? Is Bitcoin a good inflation hedge?
At the moment of writing this article inflation seems to be on everyone’s mind, emptying everyone’s pockets faster than most can fill them back up. Money (FIAT money) is now on an accelerated path toward worthlessness, not quite hyperinflation levels yet, but it’s definitely not just an economic statistical fact any more.
We all feel it when we go to fuel up our cars. We feel it when we buy our groceries or when we buy just about anything really. We feel it when buying our homes or even just renting. Everything seems to have gone up in the past couple of years by a large margin, but this past year has been absolutely brutal. Maybe not Zimbabwe brutal, but painful nonetheless. While the official inflation figures in Europe and USA are dancing around 10-20% on a yearly basis, for the end user, those figures are a joke. The prices of almost everything went up significantly more.
Even just a year ago, when one was having a debate with a “non Bitcoiner” about inflation, they mostly just shrugged it off as something completely arbitrary, that doesn’t really concern them. I’m excluding the wealthy here, because they are the anomaly and they, for the most part, orient their whole financial philosophy around “cash being trash” and invest as much as they can in appreciating assets. Most people however, do not. They barely cover their day to day expenses as it is. The reality of FIAT money and its integral inflation is just starting to hit them. It’s hitting them in the face and it is hitting them hard.
I suppose now would be a good time to discuss money printing habits of our central banks and the policies that demand it, but I’m going to make an assumption that if you landed here, you’re largely familiar with why central banks target 2% inflation and why things got out of hand completely in the recent times. To put it simply, if you increase the amount of money in circulation by a shitload, said money loses value, all things being equal. When you do it in a panic move, in record amounts, in the interest of maintaining the illusion of prosperity while the world economy was forcibly stopped to a halt for a year or two, well, you get this mess we find ourselves in right now.
There aren’t many things in life that were as predictable as this particular outcome of bad policies, but nobody seems to think that far ahead. “The only choice is between lesser pain now vs larger pain later” has shown to be a powerful wisdom yet again.
Behold these beautiful charts (below). The markets were flooded with money, absolutely flooded!
Source: https://tradingeconomics.com/united-states/money-supply-m0
Source: https://tradingeconomics.com/euro-area/money-supply-m2
So, can you protect yourself from inflation by holding your wealth in Bitcoin?
Yes and no. Maybe, probably, who knows. Fun, right? In all seriousness, nobody can tell the future, so there is no guarantee that Bitcoin will even survive in the long run. But if it does, with the way things are set up, there only ever being 21 million mined and its inflation being hard limited by code as law, decreasing over time and an expectancy that the user base continues to increase exponentially, there can only be one conclusion. The value of Bitcoin should by all means keep increasing into infinity. 21 million divided by infinity, as the meme goes.
If you want to know more about Bitcoin, here’s a good place to start:
https://bitcoin-resources.com/
Therefore my opinion, and it’s just that - an opinion, not some fact - is that yes, on a long enough timeline the answer is yes. Bitcoin will be the best and easiest inflation hedge one can possibly even dream of. I believe that it is the perfect inflation hedge, the perfect wealth preservation and transportation tool for value. If it survives, that is.
Thus far, since its inception, this theory holds up perfectly. But since the past is no prerequisite for the future, one still needs to be careful here. Heck, we probably can’t even imagine what the world will look like in a decade or two. So I don’t think it’s wise to just plow all of your money into Bitcoin for the long run and forget about it. Notice I said “all your money”. I definitely think you should own “some” Bitcoin! Yes, it might be the best performing investment for the next few years or even decades, but it’s way too risky still, to forgo managing risk completely. But I suppose that’s true for all thing.
And this is where we come to an interesting intersection with gold for instance. The traditional inflation hedge. Gold may be the much safer choice, all though it’s not without its risks in the future, but the risk to reward ratio is still so heavily stacked in Bitcoins favor, that it really is a no brainer. What do I mean by that?
Well, Bitcoin has the potential to become worth hundreds of thousands of dollars, perhaps even millions on a long enough time line. Gold does not. Gold can appreciate at best at the speed of inflation over long periods. Unless we find a way to mine asteroids, of course, which would distort all calculations and assumptions to the downside. So, the expectation here is that in the best case scenario, you’ll get to maintain your “real” wealth value over time. Not increase it, just keep it steady. That is of course excluding the cost of securing gold, liquidating it and so on. So, for the sake of argument, let’s say that in 20 years you will have the same purchasing power you have at this moment (at best).
If you stay in FIAT, any FIAT currency for this time, even the 2% quasi statistical targeted inflation will have eaten your purchasing power by roughly 50%. In reality, probably significantly more. Play around with this calculator and see for yourself.
Source (calculator): https://www.calculator.net/inflation-calculator.html
Source: https://www.economicshelp.org/macroeconomics/inflation/definition/
But isn’t that the point of an inflation hedge, you might be asking yourself? To maintain one's purchasing power in a safe and easy way? Sure. And here’s how I see Bitcoin being the clear winner in this discussion. You don’t have to, nor should you for obvious reasons (always manage risk) invest all your money into Bitcoin. If it will indeed survive in the long run and thus continue to grow and grow and grow, even 10%, maybe 20% of your whole portfolio invested in Bitcoin would more than keep up with gold or any other classical inflation hedge investment like real estates or bonds (on your whole portfolio).
Think about this for a moment. If you could ensure the same results as with the best conventional instruments by risking and tying up only a fragment of your whole wealth, why wouldn’t you?
Infinite upside, limited risk. That is the sort of gamble one would want to be making in a world filled with uncertainty and risk. Not to mention that the rest of your money is still free to be invested into other ventures, including gold, bonds and real estates, or simply kept in cash for those extremely profitable opportunities that show up unexpectedly from time to time. Let’s play around with a hypothetical example.
Disclaimer, I have no idea how high the inflation will be in the years to come, nor do I know what the price of Gold or Bitcoin will be. In the spreadsheet below I deliberately used very conservative assessments, 2% inflation and historically speaking minimal growth for Bitcoin price. All expectations are a lot higher and lot sooner, but less you all accuse me of smoking something illegal, let’s use these estimates.
Just as an example, your 100,000.00 USD savings account held in USD would be worth 82,000.00 USD in purchasing power after 10 years.
Your whole account converted to Gold would keep up with inflation (presumably) and would net you equal purchasing power, and in absolute numbers show the value of 122,000.00 USD.
But even just 10% of your account saved in Bitcoin would, under this scenario, be worth roughly the same amount as the whole 100,000.00 USD melted into gold, even though you would only ever be risking 10% of your whole portfolio. While being free to do whatever you wanted with the other 90% of your account! In other words, if Bitcoin simply ceases to exist for some reason, you would be getting a 10% haircut on your whole portfolio, while just inflation would have taken almost 20%. But if it succeeds, you’ve more than made up for the inflation and then some.
But volatility!? Bitcoin is too volatile to be thought of as an inflation hedge or even money! Look at it now, it fell with the rest of the markets. How can it be an inflation hedge?
It’s hard to argue with this. It has indeed fallen 74% from the absolute top, but is still holding at a price that is above anything before only 700 days ago (less that two years).
How did the Euro do in the past, just for comparison sake? Minus 40 from the top and only 16% away from it’s historic bottom (excluding data before 1999, because it didn’t really exist at that time). Interesting.
Anyway I agree, it is absolutely not a short term inflation hedge. It is very volatile, unpredictable and at the moment of writing, extremely correlated with the legacy markets, behaving like a high risk volatile asset. That’s the reason for the initial answer of “yes and no” in regards to Bitcoin being an inflation hedge.
Shorter term comparisons are problematic as one can always pull up data that confirms his particular bias. I could always make an argument that for the past five years Bitcoin has more than kept up with inflation, but then you could argue that in the past two years it’s barely moved. And if we go 10 years into the past on this day, the picture is, well, see for yourself. Below are some examples.
Data points taken for first week of a new year for the past 5 years, and then a comparison point for 10 years to this day on both charts (Bitcoin and gold).
Let’s look at how gold is doing right now.
Hm, gold is down 22% from the top and it barely moved in 10 years. Does that mean that gold isn’t an inflation hedge either?
In the short term, when the markets are met with “risk off” events or danger, gold and Bitcoin suffer as well. When people are scared, they pull their money out of their investments until the dust settles and the path ahead is much clearer. In the previous recession of 2008 gold had first dipped 30% lower and only after a while began climbing back up. Perhaps this time it will be similar, who knows.
But if you take a look at 20 or 30 years, the picture completely changes. Especially since 1971 when USD was unhinged and went to become this worthless piece of paper than we know today (see image near the beginning of the post). Admittedly the absolute “king of worthless papers”, but still. The point is, that in the short term, nothing is an inflation hedge, one can only judge these things over a multiyear or rather multi decade time frame.
The last thing I want to briefly mention is the real estate market. This topic is impossible to compare in general terms and absolutes, as it is heavily dependent on your particular location. One thing does hold true for most cases though and that is that real estate does go up in value over longer periods of time. These prices today, at least where I’m from, are absurd. And I believe that the reason why they are so high is not because there aren’t enough of them for the actual needs of the customers (supply and demand argument), but because people with excess money are running from inflation into investing in real estate. It’s the safe, predictable and manageable solution for many with the added benefit of being a perfect vehicle for acquiring debt, therefore using leverage to increase your wealth (bank loans).
I’ve been a huge advocate for investing in real estate for a long time, but have since found it to be way too much work, for too little reward and with quite a few hidden risks and expenses. But most of all, I seriously dislike the liquidity issue with investing in real estate, not to mention how much the whole experience depends on the “people portion” of the equation (renters, agents, clerks, sellers and buyers). I really appreciate the simplicity and effectiveness of my whole investment business being me and my computer, with as few third party participants as possible. But that’s just me.
It is a sad world when everybody now has to become an actual investment expert just to maintain the relative value of their savings. Just to keep what they’ve earned, built and saved up. Since most aren’t capable, educated or brave enough to invest in the stock market or similar, they instead now turn to investing in what they’re familiar with, real estate. But in doing so they keep pushing the prices higher and higher. All that achieves in the end is further transfer of wealth from the people who don't have enough, to those who have too much and don’t know what to do with it. It’s making life a lot harder for those who actually need a home, not just an investment vehicle. It also builds up an environment for the perfect storm, a terrible cascade of defaults, market busts and depositions in the real world.
Alas this problem originates in the underlying properties of today's FIAT currencies. Their unrelenting loss of value due to preprogrammed inflation. That is one of the reasons why I am such a passionate advocate for Bitcoin. We need simple, reliable, understandable money that will not keep losing its value over time, forcing us to frantically spend and invest everything we can, but a form of “hard money”. Something we can save without it being stolen from us every year by inflation. Money that will hold its value. Money that we can keep safe from all prying eyes and dirty little hands. Money that can store our wealth over longer periods of time and that we can access at any time on the count of its liquidity and accessibility. Money that is not influenced by a single entity, manipulating it’s supply at its whims (central banks).
I hope that Bitcoin is that hard money solution, not just an inflation hedge. Not a solution to all of our problems, to be sure, but an alternative to FIAT money, an international store of value, that can coexist besides FIAT money. There is a purpose and function to both systems, I suppose. And of course there are faults and problems with both as well.
My view then is that yes, Bitcoin might just turn out to be the best inflation hedge when viewed back decades from now, but is nerve wrecking and volatile in the meantime, or it might go to zero. Not much in between to be honest. I guess the old diversification philosophy is still the best for those who just want to maintain their wealth and protect it from getting eroded by inflation. Personally I like the approach that maximizes liquidity with free cash in the bank and on the other hand deploys capital where it has the highest upside potential, in risky assets. So something like 80% cash and 20% high risk investment, like Bitcoin or stocks as an example.
I always felt that having liquid cash brings me a sense of inner peace and freedom, along with the ability to jump on those unicorn opportunities that show up in our lives, when we least expect them and are therefore least prepared to take advantage of, when the situation arises. Such as an impending recession of gigantic proportions, that is descending like a dark cloud over our heads as we speak. Having 80% of your wealth available to jump on the coming discounts seems like a good thing to me, or you know, at least not having to sell your stocks or real estate for paying the exuberant bills and putting food on the table on the other end of the spectrum. Bitcoin then, being a form of cash and a high risk, high reward asset at the same time, sounds pretty damn good to me.
Disclaimer: nothing here is financial advice, just a fellow trader meditating on his trading journey, sharing the lessons he learned and debating some personal opinions that are only that, opinions and nothing more.
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