Bitcoin vs. Cash Inflation — Which Is Better?
Of the many things that can and have been said about money, there is one that is probably true for everyone: money should hold value.
On the surface, this seems like a self-evident statement. Money should hold value — who would disagree? However, there is another layer implying that to hold value money should not lose value.
As such, money should store value by either retaining the value it already has, or increasing in value, but certainly not losing it. That's where the chorus comes in, singing about how Bitcoin is a store of value, but let's not get ahead of ourselves.
Both Bitcoin and cash have inflationary aspects which pretty much boil down to one simple fact — new supply is minted and added to their respective circulating supplies.
Is Bitcoin inflation better or worse than cash inflation? That is the question we seek to settle here, and by the end of this read, you should be well-equipped to decide which is a better store of value: Bitcoin, or cash.
How Bitcoin Inflation Works
Contrary to popular belief, Bitcoin is an inflationary digital currency in terms of circulation supply. There is lots of misinformation out there claiming that Bitcoin is non-inflationary, but that simply isn't true.
A very nifty feature of the world's most popular digital currency, however, is that it is also a deflationary asset in the sense that the purchasing power of Bitcoin has increased over time. This can at least partially be attributed to the decreasing rate of inflation in the circulation supply. But, more on that later.
Bitcoin inflation happens via a somewhat complicated process called mining. Even if you don't know exactly how mining works, you've probably heard this term thrown around before.
Basically, mining is an essential Bitcoin network service that validates transactions to make sure they're honest, then rewards the miners who do the heavy lifting with Bitcoin. The process goes a little something like this.
You, along with several others, make a Bitcoin transaction.
Those transactions are rolled together into a block.
The block is allocated to miners.
Miners use special hardware mining rigs to guess the correct target hash.
Whoever guesses the correct hash receives the block reward for that block.
The winning miner broadcasts the block to the rest of the network.
If the majority of the network signals the block is OK, it is added to the previous block.
Each block is added to the one before it, forming a block of chains, or...blockchain.
The key point to hone in on is block reward. Every block reward is paid out in BTC. Currently, the block reward is set to 6.25 BTC per block, so every time a miner wins the block, that is the amount they're paid.
Here is the most important part to understand — the BTC used to pay the block reward is freshly minted from the 21,000,000 maximum Bitcoin supply and passed into the circulating supply. So, every time a block is mined, Bitcoin is added to the overall circulating supply.
This is how inflation happens in the Bitcoin network. Since there can only ever be 21,000,000 BTC, there is a limit to the amount of Bitcoin that can be mined. Adding to the elegance of the Bitcoin design, the mining reward is halved every four years in an event known as the Bitcoin halving.
So, in four years from now (June 2020), the block reward will go from 6.25 BTC to 3.125 BTC, bringing the current Bitcoin inflation rate even lower. Eventually, the Bitcoin inflation rate will be zero when all 21,000,000 BTC have been mined (estimated to occur in the year 2140).
The advantages of the BTC inflation model backed by the Bitcoin halving mechanism are many, but there are few notable standouts.
Over time, Bitcoin is programmed to be a deflationary, rather than inflationary, digital asset.
Bitcoin monetary policy is hardcoded at the protocol level — no central banks.
Quadrennial Bitcoin halving encourages price stability & purchasing power retention.
Unlike cash, Bitcoin is not issued via a central bank. The miners who compete for block rewards and thus mint new BTC into the supply are globally distributed, so all monetary policy issues are either already programmed into Bitcoin, or decided by majority consensus.
How does cash stack up in contrast?
How Cash Inflation Works
Cash inflation, such as for the US dollar, works very differently from Bitcoin. Whereas Bitcoin is constantly diminishing additions to its supply, the same can't be said for traditional monetary supply assets like the dollar.
In a nutshell, the way cash inflation as caused by a rise in monetary supply works is simple. If too much money gets added to the circulating supply without the underlying economic activity present to back it up, inflation occurs.
Inflation in this case refers to a rise in the cost of goods and services. So, here's an example. Imagine that there is a global pandemic happening (we promise, this is just an example). Economies everywhere are disrupted, and the US Fed pledges to support the economy by flooding it with liquidity.
Where does this liquidity come from? In large part, it means adding money to the supply. However, doing so will also bring the purchasing power of the dollar lower, causing a ripple effect that eventually requires people to charge higher prices in an effort to balance their earning and spending power.
If money is added to the supply but economic growth is either growing in tandem or outpacing supply, then inflation is avoided — and in some cases, if economic growth is really humming along, then deflation might occur.
There are other sources of inflation besides adding cash to the supply, as well. In fact, there are at least 4 or 5 straightforward ways in which shifts in the cash economy cause inflation.
In contrast to Bitcoin, however, cash supply, and the monetary policies that so affect it, are controlled by central banks such as the Federal Reserve. It is ultimately up to the judgment, politics, and other human (all too human?) factors that go into the ever-changing policies behind money.
Like shifting sands, incoming and outgoing administrations bring alternating views of the best ways to handle money, leading to a constant flux in the value of your dollar.
Is Bitcoin Inflation or Cash Inflation Better?
Bitcoin is not a truly inflationary asset. It is programmed at a protocol level to eventually reach zero inflation, after which point no additional Bitcoin can ever be created.
Cash, on the other hand, is rarely deflationary, and has no cap on supply. That's why, in times of crisis, central banks are free to seemingly create value out of thin air before handing it over to corporations in the form of bailouts.
In such scenarios (which are, unfortunately, all too common), money supply is inflated to benefit large corporations, while the value of that money for everyone else becomes diluted.
Bitcoin doesn't favor anyone — it is a level playing field with a set of rules that can't be influenced, modified, or broken by anyone. Moreover, since the Bitcoin end game is to achieve a fixed and final amount of BTC, it is far more similar to other valuable finite resources, such as gold, than it is to cash.
Bitcoin has a fixed inflation rate between each halving period, and owing to its design, is always declining. Cash does not — a central bank can always turn the printer on and flood the market, as has happened throughout history in countries as disparate as Germany, Argentina, Zimbabwe, and yes, the US too.
Is Bitcoin a Store of Value? Is It Better Than Cash?
Whether Bitcoin is a better store of value than cash is subjective to a number of considerations.
First and foremost is duration. Duration refers to the timeframe in which you expect to be hunkering down with your assets. Keep in mind that the average lifespan of cash currencies is 27 years — does that seem like a good store of value to you?
Bitcoin, on the other hand, is 11 years old and has grown in value by over 6,000%. During that time, it has also decreased its block reward on three occasions without a hitch, creating an ever-more scarce asset that also perfectly suits the digital landscape of our modern times.
Additionally, and in distinct contrast to both gold and cash, when you buy and store Bitcoin, it is you who owns it — not the bank. Ever taken a hard look at your cash? It says Federal Reserve Note, which is another way of saying it doesn't actually belong to you.
So, is Bitcoin a store of value? Given its price history since 2009, and it's performance throughout the COVID-19 pandemic of 2020, one can only conclude with an unequivocal yes.
Is Bitcoin better than cash as a store of value? $100 worth of cash in the year 2000 is worth $148.89 in 2020. Put another way, $100 has lost a significant amount of purchasing power in just 20 years.
Which is the better store of value? We'll leave that up to you to decide, but from here, the answer seems pretty clear.
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