In this post we will explore the topic of inflation and Bitcoin. It’s a term that gets thrown around a lot, but what does it really mean? Let’s break it down together in a way that’s easy to understand and discuss some common questions and thoughts we have about it.
What Exactly Is Inflation?
Inflation is a concept that can seem a bit abstract, but it’s something that affects us all. To start, let’s look at how two major institutions define it.
The U.S. Federal Reserve refers to inflation as “the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy.”
On the other side of the pond, according to the European Central Bank (ECB), inflation is a general increase in prices across the market. This means that while some prices might go up and others might go down, overall, prices are rising. This general increase means that the money you have today buys less than it did yesterday. In simple terms, inflation causes money to lose its value over time.
How Does Bitcoin Relate to Inflation?
Now that we’ve got the official definitions out of the way, let’s talk about Bitcoin and how it fits into the picture of inflation.
When we think about inflation, a common question is why it’s considered normal for prices to keep rising. For instance, why is it logical for a house today to cost so much more than it did in the 1950s? Many of us assume that as prices rise, so do our salaries, but that’s not always the case. This realization often leads to a deeper exploration of what inflation really means.
One perspective is that inflation is caused by an increase in the money supply. When more money is available in the economy, it can lead to higher prices. This isn’t something that central banks explicitly mention on their websites, but it’s a very important factor to consider. Let’s consider the ECB for example. that even has a target inflation rate of 2% per year. But why 2%? Who decided that, and is it really necessary?
Where Does Inflation Come From?
There are many theories about what causes inflation. Some say it’s due to the rising costs of goods and services, while others argue it’s because more money is being printed. For example, the war in Ukraine has been linked to higher prices for certain materials, which affects the overall cost of goods. However, with Bitcoin, the narrative is often different.
Bitcoin enthusiasts argue that inflation primarily stems from the increased printing of traditional currencies. Since the 1970s, when the gold standard was temporarily abandoned, the supply of euros and dollars has exploded, leading to a significant rise in prices.
Money Creation and Its Impact
During crises like the COVID-19 pandemic, governments rolled out massive support packages. While this was reassuring to hear, it also raised questions about where all that money was coming from. Is it just sitting in a government savings account, or is it newly created?
It turns out, much of it is newly created. The process of money creation involves issuing loans and bonds that central banks buy, injecting more money into the economy. This isn’t the same as using someone else’s deposited money. Instead, banks create new money with a click of a button. This influx of money can drive up prices, contributing to inflation.
The Role of Central Banks
The central banks tries to keep the economy stable by adjusting interest rates and controlling the money supply. For years, low or negative interest rates have been used to stimulate the economy by making borrowing cheaper. This also involves creating more money, which can lead to inflation.
Bitcoin offers a different approach. It has a fixed supply of 21 million coins, meaning new coins can’t just be printed at will. This characteristic makes Bitcoin resistant to inflation in a way that traditional currencies are not.
The Bigger Picture
Inflation affects purchasing power. If prices rise but your salary doesn’t keep up, you end up being able to buy less. This was evident in 2022 when inflation rates in many large economies globally were over 10%. Even if inflation drops to 2-3% the following year, it’s still on top of the previous year’s increase, making it harder to catch up.
The idea that constant economic growth is necessary is also worth questioning. If we keep pushing for growth, we’ll eventually run out of resources. Instead, could we consider a system like Bitcoin’s, where the money supply is fixed, and spending decisions are more deliberate?
We don’t have all the answers, but we hope this discussion has shed some light on what inflation is and how it impacts our lives. It’s important to question and think critically about economic policies and their effects. If you have any more questions or topics you’d like us to cover, please let us know by contacting us.