For those familiar with the field of cryptocurrency, it should be noticed that it is often mentioned together with inflation and cash recently. While not a heated debate, these conversations are generally pro-Bitcoin; as a store of value, many see the leading cryptocurrency as a powerful hedge against the depreciation of the U.S. dollar due to the Federal Reserve’s actions. Resulting from crazy money printing.
To fully understand this point, it is first necessary to understand what inflation is (i.e. "inflation") and how it affects cash. Inflation (usually) means the growing cost of goods and services, i.e. money becomes less and less valuable over time. For example, in the United States in 1995, the price of a gallon of milk was $2.52. By 2020, the price has risen to $3.54 - which means that the value of "$2.52" has declined in these 25 years. People can no longer buy the same item at the original price.
Therefore, inflation is definitely a problem in cash as a long-term store of value, and this problem exists because ordinary people always tend to "save money". To address inflation, banks have historically dealt with it by setting cash rates at or above the rate of inflation. For example, the average interest rate set by the Bank of England between 1975 and 2008 was 9.8%, and the average inflation rate in the UK during these three decades was 6.36%. During the same period, annual U.S. inflation averaged 3.5 percent, while the Federal Reserve Funds rate averaged 6.4 percent.
This means that over the past 33 years, on average, cash savers in the UK and the US have been able to insure that the value of their cash has not been affected or exceeded by inflation. The situation is much the same in Europe and elsewhere in the world.
But since 2008, everything has changed dramatically. During the 2008/09 global financial crisis, central banks in advanced economies (especially the US and UK) implemented massive quantitative easing to keep stock markets afloat. Today, this initiative has also been proposed again to address the global economic shock caused by the Covid-19 epidemic.
US Federal Funds Rate (1975-2020)
Continued money printing and lower interest rates
Quantitative easing (QE) is often simplified as an indirect increase in money printing. Generally, the central bank will increase the basic money supply in the real economic environment through purchase operations in the open market. Since September 2008, the Federal Reserve has "printed" more than $6 trillion, while the Bank of England and the European Central Bank in the UK have also issued around £800 billion and €5 trillion, respectively, over the same period.
The economic theory behind quantitative easing is that fresh money flowing into the stock market should encourage companies to invest and grow, which in turn should benefit the "real economy", creating jobs and wealth for ordinary people. This is further fueled by extremely low bank interest rates, which central banks hope will encourage companies to borrow money to invest and boost banks' balance sheets in the process. Once the situation becomes more stable, the assets purchased by the central bank can be sold, thereby cleaning up the balance sheet.
However, the reality of quantitative easing could be very different from the ideal. This move may have considered the downside of excessive money printing, but even if it lowered inflation, the accompanying ultra-low interest rates still reduced the value of cash at an abnormal rate and could not fully offset inflation. Between September 2008 and December 2020, interest rates in the UK and UK averaged just 1.6% and 0.7%, while inflation averaged 2.7% and 1.8%, respectively.
This means that for more than a decade, any savings held in the US, UK and many other advanced economies has essentially lost money as the value of the currency has been eaten away by inflation. At the same time, wage growth has been subdued: UK wage growth has stagnated during this period, with workers today earning 2.4% less in real terms than in 2007.
Inflation Rates in the United States (1975-2020)
The Birth of Bitcoin and the New Monetary System
Taken together, these factors place the average citizen in most advanced economies in a rather dire economic environment. This is also what Satoshi Nakamoto, the anonymous creator of Bitcoin, foresaw, at least in part. In 2009, Satoshi Nakamoto dug out the first block of Bitcoin, the Genesis Block, and inserted into the Genesis Block the original "Times" about the British Chancellor of the Exchequer approving the implementation of the first block. Reports of a second round of multi-billion pound bank bailouts - also credited with creating the global financial crisis.
As further elaborated in the Bitcoin white paper, Satoshi Nakamoto aimed to establish an egalitarian monetary system that would resist corruption and crime in multinational financial institutions. This lofty goal has given birth to blockchain technology: in this case Bitcoin, an immutable, "indestructible" transaction record of transactions in its native digital currency that is owned, managed and controlled by users Ledger.
Since 2009, the value of Bitcoin has risen from $0 per coin, to over $55,000 today, an annual growth rate of more than 264%. This has far exceeded the inflation rate of the same period. It can be said that the growth rate of almost any asset in the world cannot match it. In just over a decade, Bitcoin has grown from a small programmer's project to an asset now owned by some of the world's largest banks, fund managers and corporations — including those that, in 2018, put Bitcoin People called scammers.
The entire cryptocurrency ecosystem has also grown over the past decade. This is largely thanks to the creation of Ethereum, a fully programmable blockchain. Currently, Ethereum is the foundation of the decentralized finance (DeFi) world, which is composed of hundreds of platforms and protocols; Intervention and manipulation by traditional finance.
Beyond the traditional financial system, how to "equally create wealth" without cash
Today, Ether (Ethereum's native token) and thousands of other currencies and tokens (also known as "passes" and "tokens") also fight inflation, providing ordinary people in traditional finance Unobtainable wealth creation opportunities including earning up to 20% APY (Annual Yield) with stablecoins. Stablecoins are tokens that are pegged to "real-world" fiat currencies such as the U.S. dollar and are not as volatile as bitcoin and other well-known currencies in the market. There hasn’t been an opportunity like this in traditional finance since the early 1990s.
Indeed, with central bank balance sheets at unprecedented levels and interest rates near negative, cash is unlikely to become a profitable way to save anytime soon. Not only that, but without a credible plan to shrink the Fed's $7 trillion outstanding debt, the dollar, the world's reserve currency, could start to lose value. This is why many believers believe that "Bitcoin is the first". In their view, Bitcoin is a value storage tool that competes with the US dollar and even gold. Therefore, Bitcoin is also called "digital gold".
Not everyone is convinced by the above arguments, and there are still many people in traditional finance who strongly oppose Bitcoin and other cryptocurrencies, believing that those who hold Bitcoin will "meet disaster." Still, the market continues to grow, cash has become somewhat outdated as a store of value, and the total market capitalization of digital assets now exceeds $1.7 trillion. In the future world, individuals may decide how to save for their future, and as almost all areas of the world are moving towards digitalization, it is no longer a novelty that millions of people choose to hold cryptocurrencies.
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