How Bitcoin Could Save Us from Hyperinflation
Tags: Hyperinflation, Us Dollar, Covid 19, Bitcoin, Coronavirus

The COVID-19 coronavirus pandemic has brought large parts of the global economy to a standstill. For the better part of two months, factories in China were shuttered, disrupting supply chains and offering a glimpse of what was to come. Across many countries, businesses have been ordered to shut down, and economic activity has slowed to a trickle. And just as the United States now takes the leading global COVID-19 cases, the US Congress has passed a a multi-trillion dollar economic stimulus package, which has raised fears of future hyperinflation.

Fire Up the Printing Presses!

When central banks increase the money supply by printing more bills, it leads to an increase in the price of goods and services over time. But if for some reason they print enormous quantities of cash very quickly, it can cause hyperinflation and the currency can lose it’s value.

Historically this has been done to pay for government spending during times of crisis. In the event of mass unemployment or shutdown of essential services, governments may feel that a breakdown of social disorder or violence could occur. Faced with these problems, it can seem like a rational solution to fire up the printing presses.

Printing more money can work in the short term, but if the crisis continues or gets worse, it can create a downward spiral where the cure was worse than the disease.

The biggest examples in modern times were Germany during and after World War I, or Zimbabwe in the early 2000s. A more recent example would be Venezuela, which was once the richest country in South America. Venezuela was heavily dependent on oil exports to fund government spending, and as long as it remains profitable to export oil, the good times continued…

But in 2013 when oil prices collapsed, the government faced a sudden loss of revenue, and decided to just print more money to pay for state spending. Doing so rapidly devalued the bolivar (the national currency) and led to a catastrophic increase in consumer prices. According to that country’s own central bank, the inflation rate rose 53,798,500% between 2016 and April of 2019.

One coffee? That’ll be 100,000,000 bolivars, please. (Image source: Bloomberg)

Bloomberg actually created a “Cafe Con Leche Index” as a tool to track Venezuelan hyperinflation. It simply measures how the price of a cup of coffee in Venezuela’s capital city has changed over time. Right now, it’s about 100,000,000 bolivars (less than $1 USD).

Is it any wonder that cryptocurrency adoption in Venezuela is soaring? There’s really no other choice.

What about the US Dollar?

The US has racked up trillions of dollars in debt over the past 20 years and seems to print money like it’s going out of style. The latest example is the $4 trillion coronavirus economic relief bill which offers $1,200 to every American adult and billions of dollars in bailout money for struggling corporations, among other things.

However, the US dollar is a different case than the other currencies mentioned due to its status as a global reserve currency. Over 60% of foreign bank reserves and 40% of the world’s debt is denominated in USD. The US dollar is perceived as a stable store of value, and is a standard against which all other fiat currencies are measured. This allows the US to get away with exorbitant spending that would devalue many other national currencies pretty quickly. As long as the US dollar remains the dominant global reserve currency, that probably won’t change.

But can this go on forever? The dollar is no longer backed by gold, and in the wake of this latest round of massive spending the yield on 1-month and 3-month treasury bonds has dipped below zero. If other countries begin to lose confidence in the dollar, this would endangered its’ reserve currency status, and suddenly the bill would come due for the federal spending party.

Could a Venezuela-like scenario happen in the US? It’s not likely to happen next week or next year, but many in the cryptocurrency space believe that as long as the Fed continues “Unlimited QE”, it’s not impossible.

With a cryptocurrency like Bitcoin that can never happen. With an algorithmically limited supply, it is simply impossible for a central bank to devalue your money though reckless printing. And unlike the USD, which continues to lose purchasing power over time, BTC has consistently gone UP in the long term.

For people in countries with unstable fiat currencies, bitcoin has already proved to be a stable alternative for preserving wealth. The day may come when even people in wealthy countries with strong currencies may have to make a similar move. While we don’t think even the most passionate crypto enthusiasts want the dollar to fail, BTC will be ready and able to fill the void should it happen.

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