Money represents value, since we use it to buy comfort and other necessities of life. However, it is a known fact in economics that the value of money is not static. It can lose its value due to inflation. When this happens, a fixed amount of money loses its purchasing ability.
The owner finds out that their money affords less than what it did initially. This is why people strive to protect themselves from the devaluation of the money that they have due to inflation. Here’s how to protect yourself from hyperinflation using Bitcoin.
As you may have observed, we used the term inflation and later, we used hyperinflation. Both of them are conditions that lead to the reduction in the purchasing power of money. However, hyperinflation is a more intense situation, so we have to define these appropriately.
What is Hyperinflation?
It is important that we explain inflation before we define hyperinflation. Inflation is the devaluation of money due to low productivity or high cost of production. It is the reduction in the purchasing power of money over time.
This implies that a definite amount of money can no longer purchase what it could buy in the past. Inflation can also occur as a consequence of monetary policies such as the printing of more money by the central bank of a country. With more money in circulation, the law of demand and supply implies that the value of the money reduces.
Inflation can be calculated by comparing the price of a commodity in the past with respect to its present price. This gives economists an idea of the rate of inflation or how much value money has lost. When inflation has an annual value of more than 1000%, it is considered to be hyperinflation. This means that the money of that country loses value really quickly. Folks that earn a specific amount of money would find it difficult to afford what they could afford in the past. This creates the need to hedge money or create a buffer that minimizes the effect of hyperinflation.
Causes of Hyperinflation
There are several causal factors that may trigger hyperinflation. Some of them are:
When the economy of a country contracts or experiences no growth or moves in the negative direction, there are several terms that best express such conditions. One is recession, and this occurs when the economy contracts for about 6 months. If it persists for longer periods such as one year or more, it is described as depression. This sort of condition is accompanied by loss of productivity and loss of jobs such as witnessed during Covid19 lock-down.
The effect is that central banks such as the US Treasury Department printed more money to help kick-start the economy. Even though the money was meant to boost employment and productivity, it caused more money to circulate and consequently reduced the value of money in the economy.
Wars And Conflict
When countries fight wars, a good chunk of their productivity is expended on financing the conflict. This happens at the expense of other economic activities that would have benefited the economy. Since other sectors of the economy are affected due to the diversion of manpower and other factors of production in the prosecution of the war, the value of the country’s money is affected. This is the reason why post-war economies are usually adversely affected by high inflation – hyperinflation.
Trade Deficits And Low Productivity
In the United States, the rate of inflation in 2020 was just 1.5% despite the fact that the Federal Reserve has printed a lot of money to offset the effects of Covid 19. This is below the 2% target and an indication that the correlation between printing money and hyperinflation is not as pronounced with productive economies. This is a sharp contrast with what is experienced in countries with low productivity such as Venezuela, which has been affected by hyperinflation for years.
One of the reasons why Venezuela has continued to default on its loans is that the price of crude oil, its primary export, has fallen. Furthermore, it is hugely dependent on imports and has low productivity. Its trade deficit means that despite printing the Bolivar, it has had no effect on its debt profile, rather having a lot of the currency in circulation has resulted in hyperinflation since the supply of the national currency is far more than its demand.
How To Survive Hyperinflation
There are many strategies that people employ to make sure that their wealth is preserved. If you observe the price of Bitcoin, you’ll understand that, unlike any currency that is used as means of transfer or storage of value, Bitcoin is volatile. This means that its value fluctuates based on the demand of the market. When demand is very high, the price of Bitcoin soars, but when there are uncertainties in the market, its price drops. But this is not the full picture.
When we study the price of Bitcoin since its inception, it becomes easy to understand that this is an asset that has historically increasingly been in demand. This is reflective of its price which has increased over time. In other words, the Bitcoin market has been bullish cumulatively. This means that periods of drop in the value of the asset are temporary preparation for the next price surge. This makes Bitcoin a good store of value for people who want to hedge against hyperinflation.
It’s All About Demand
You may be wondering why financial experts such as Fundstrat’s Tom Lee are of the opinion that Bitcoin is a good hedge against hyperinflation. One of the reasons is that Bitcoin is finite. There are just 21 million BTC that could come into circulation. After the last bitcoin is mined, no other can be generated. This means that with the benefit of foresight, we can conveniently infer that the value of the digital currency will continue to appreciate instead of depreciating due to inflationary trends. This makes Bitcoin a long-term hedge for hyperinflation.
In essence, people who wish to create a hedge against hyperinflation should hold BTC. In fact, investing in the cryptocurrency assures having your money in an asset that would appreciate over time and give you more value than if you had your funds in fiat, as confirmed by Tom Lee who stated in 2019 when BTC hovered around $9000 that:
“Bitcoin is vulnerable but I don’t think the thesis is broken. So if someone says this means bitcoin’s a broken story now. I mean l think long term holders should not worry,”
In other words, irrespective of its volatility, BTC price is one-directional long term – upwards.