Inflation is an element that plagues every traditional money. Since more cash is still continuously being printed, it can decrease its value in a simple case of supply and demand with the worst possible scenario being hyperinflation. Cryptocurrencies like Bitcoin are designed to resist this.
Inflation: How your Money is Becoming Worth Less
Inflation has been a thing ever since money was created. The value of money is set in the same way as for any product: through the demand for it. The more demand there is for a euro or dollar, the more it will become worth when compared to other currencies. Another aspect is the supply of a specific currency there is. Central banks can decide to print more money if they deem it necessary. When more money is being printed, this can have a negative effect on its value since there is a larger supply of it. Inflation is the rate at which a specific currency is losing its value.
“One speaks of inflation if there is a broad increase in the prices of goods and services, not just of individual items. As a result, you can buy less for €1. Expressed the other way around, a euro is worth less than it was before.”
– European Central Bank
A simple way of seeing how inflation has been increasing is by asking yourself what you could have bought with 1 dollar many years ago. This dedicated website shows you how much a certain amount of dollars was worth however many years ago. It indicates that a single dollar 100 years ago would now be the equivalent of $12,91 – a massive 1190.58% change. Even if you had a 2% salary increase last year, you’d be gaining less than the average inflation rate.
This’d mean that you’re not actually gaining anything in the end. In short, your money is losing its value over time. This amount of time can, however, even be extremely short.
State of Emergency: Hyperinflation
Such is the case when hyperinflation occurs. In hyperinflation, the value of a currency drops drastically and can get to the point of being worth nearly nothing. So what exactly is hyperinflation?
From a purely technical standpoint, hyperinflation is taking place when the monthly inflation of a currency is higher than 50%. In comparison, in 2019 the worldwide inflation average for the entire year was 3.41%. Prices for the simplest products like food skyrocket in these cases, which forces the central bank of its country to continuously print more money. Turning the money printer on in turn leads to a large increase in supply, devaluing the currency even further. This is a vicious cycle with devastating consequences that’s hard to get out of.
In recent times, we’ve seen a few hyperinflations. In Venezuela, hyperinflation has reportedly caused a 130,060% inflation in 2018. Currently the situation in Lebanon may be escalating as well, having risen from a 1.33% inflation rate in October 2019 to 10.04% in January 2020. The largest hyperinflation known in history was a massive 13,600,000,000,000,000% monthly inflation rate, leading to prices being doubled every 15.6 hours. This not only has a devastating effect on the economy, but more importantly on the country’s people. Even the most basic food can become incredibly expensive and your entire savings can suddenly become completely worthless.
Disinflation is within reach: Bitcoin and other cryptocurrencies
Indeed Bitcoin and other cryptocurrencies could be an answer to this. Carlos Hernandez mentioned in a New York Times article how Bitcoin saved his family during the Venezuelan crisis.
First let’s debunk a common myth. Many state Bitcoin to be deflationary. This is actually not the case – Bitcoin does inflate since new Bitcoins are simply still being created. Deflationary would mean that the amount of Bitcoins existing is being reduced.
The amount of inflation, however, is quickly decreasing. This is referred to as disinflation.
The amount of Bitcoins created is set to decrease roughly every four years in an event known as the Bitcoin Halving. In it, the amount of newly generated Bitcoin will be reduced by 50%, making Bitcoin incredibly more scarce. Since currencies work through supply and demand, Bitcoin’s decreasing supply is more likely to increase its value rather than decrease it as for traditional currencies. Bitcoin is not the only cryptocurrency that uses halving events – many others such as Litecoin and Bitcoin Cash also make use of this disinflationary system.
Another interesting element against inflation is that the maximum amount of Bitcoins to ever exist is hard coded to be at 21 million. Once 21 million Bitcoins exist, no new ones will be created. We learnt that in hyperinflation the endless printing of new money can heavily devalue a currency. Even with normal inflation, the printing of more money can cause a currency to drop in value. With Bitcoin, the money printer cannot be turned on to increase the amount of new coins.
Sure enough, Bitcoin is designed to resist inflation. What’s more: with crypto, you can actually fully own your hard-earned money. Rather than needing to leave it in the care (and at the mercy) of a financial institution, you can “be your own banker”. And with our hardware wallets, we empower everyone to take full control over their own assets securely.