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Why Bitcoin Is a Hedge Against Inflation

With prices skyrocketing on everything from gas to groceries to vehicles, inflation has become one of the hottest topics across the globe. Even the US, which has historically shown mild inflation relative to the rest of the world, has recorded its highest CPI inflation rate in the past 25 years at 6.2%.

Inflation is a tricky topic for multiple reasons. For starters, there are multiple definitions of inflation. The most mainstream definition for inflation is: a general increase in the prices of goods and services in an economy. The CPI is intended to measure this mainstream definition of inflation. However, Austrian economists simply define inflation as an increase in the total supply of money. Metrics such as M2 money supply are intended to capture increases in the money supply. However, because of un-auditable shadow money systems like the Eurodollar, there is no true method for calculating the total level of global US dollar inflation as defined by the Austrians. 

For purposes of this post, we will be discussing the mainstream definition of inflation that we see happening before our eyes. Why is the general price level going up? As with anything related to a complex global economy, the answer is complicated. 

In some nations, we can be quite confident that an increase in the money supply is the primary driver of price increases. Nations like Venezuela and Sudan, with inflation rates of 1,575% and 366% respectively, are almost certainly pumping boatloads of new money into the economy leading to an exponential increase in prices. 

Price increases in more developed nations such as the US, Canada, or South Korea are harder to pin on one specific reason. A combination of COVID-19 shutdowns, a highly optimized (i.e. fragile) global supply chain, and an increase in government stimulus has naturally led to shortages across a multitude of goods and services. When it became more difficult to produce and transport things (i.e. reduced supply) at the same time that people received thousands of dollars in stimulus payments (i.e. increased demand), the obvious outcome was demand outstripping supply.

In other words, people are bidding on a smaller-than-usual supply of goods and services, which is naturally leading to a rise in prices. Put another way: supply chains broke down, goods and services became more scarce, and people upped their bids in order to acquire these increasingly scarce goods and services. While fiscal stimulus packages have allowed people to increase their bids more than they otherwise could have, a bidding war on globally reduced supply was inevitable even without fiscal stimulus.

Whether you are in Venezuela or the US, Bitcoin provides a long-term hedge against government manipulation of money and the economy. The case is obvious in a nation like Lebanon, where money has been devalued by a factor of 2.5 over the past year. Translating this to a real-life situation, let’s say Larry has $1,000. Last year, he could have made ten trips to the grocery store before running out of funds. Today, however, this same $1,000 only lasts four trips to the grocery store before running out. In an economy with price increases so high, storing wealth in scarce assets is a matter of necessity. Bitcoin, as the most scarce money on earth, is the optimal solution to preserve purchasing power over the long run. It is fully auditable, uncensored, and cannot be debased by central authorities. No other asset on earth can make these claims.

For those living in more developed economies like France or the US, the case for Bitcoin is not quite as clear-cut. That being said, even annual price increases of 2 to 5 percent destroy wealth over the long term.

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