Hello my fellow humans,
In a sense, I’m pitting the U.S. dollar vs. Bitcoin today. Although I’m biased (Team Bitcoin), my intent is to give you the most accurate information, so you can make your own decisions.
Inflation is well known as a rise in prices. The first place many people notice inflation is the grocery store. In order for prices to rise, the dollar is actually being devalued. For example, $10 can buy you a Subway footlong this year, but next year you might need some extra change. By the way, they used to be $5.
Bitcoin is peer-to-peer electronic cash, so it doesn’t rely on a central authority or bank to operate. It’s open-source software (public design), so it’s not owned or controlled by anybody. Most importantly, anybody can join the network.
Monetary Policy
Gold was used as money in the past. People would exchange gold before cash existed. Governments around the world, including America, decided to create paper and coin representations to match their gold reserves. The U.S. government terminated the gold standard in 1971. Ever since, the dollar has been designed to lose value through inflation. Inflation encourages spending rather than saving, which could lead to economic growth.
The Federal Reserve (Fed) is the issuing authority for U.S. dollars. This means they are responsible for adding new dollars to our nation’s money supply, especially when unexpected demand for the dollar rises. I believe everybody should learn these lessons in high school. The Fed prints new money on demand. This system can be described as flexible monetary policy.
The year 2020 has been an extreme example of money printing. The demand for dollars was and is extremely high. The reason is simple — some people and businesses are going broke due to economic slowdown. Most years are not like 2020. One thing led to another, and the Fed was unexpectedly printing trillions of dollars. Remember that $1,200 stimulus check? Of course we do. Where did it come from? It is possible that the Fed will print additional trillions of dollars before the end of the year. Note: the Treasury Department handles the actual production of cash and coins.
Inflation does not apply to Bitcoin. Bitcoin’s software is designed to create a specific amount of new Bitcoins every 10 minutes. Remember Bitcoin is electronic cash. 6.25 new Bitcoins are created every 10 minutes (numbers on a screen). Then in 2024, 6.25 will be cut in half to 3.125 (every 10 minutes) for the following 4 years. This supply decrease is known as the Bitcoin Halving — occurring once every 4 years until the year 2140. No more than 21 million Bitcoins will exist. This is known as a disinflationary schedule, opposite the dollar.
Bitcoin has proven to be the most secure computing network in the world, which means its disinflationary schedule can be changed only one way — hacking. Since Bitcoin was created in January 2009, it has not been hacked. The Lindy effect applies to Bitcoin, which means the longer Bitcoin survives, the more secure it becomes. This is important because if Bitcoin continues surviving, it is likely to never be hacked. If Bitcoin is never hacked, its monetary policy will never change. If its monetary policy never changes, Bitcoin will always follow a disinflationary schedule. This system can be described as inflexible monetary policy.
Buying Bitcoin is not the only way to protect yourself from inflation. There are many other options. The point is to learn about our financial system. Gold is the only form of money that I know of that has stood the test of time (thousands of years), while also gaining tremendous value against the dollar. As a man who enjoys both technological innovations and money, I’m hoping Bitcoin will have similar success.
Until next time,
Salvatore Norge
This is not financial advice. I encourage you to do your own research.