Letter #27: Bitcoin - An Aspirational Inflation Hedge
There are a few things in life that we all have in common, no matter who we are or where we live. Perhaps one of the most important is that we all use some form of money to procure what we need in our daily lives. Some of us use credit cards, while others use cold hard cash. Even people currently living under a barter system use the goods they produced themselves as a type of money with which to exchange for someone else’s goods. No matter what type of money we use, we want it to maintain its purchasing power so that we can continue to enjoy the fruits of our labor throughout our lives.
Inflation is the enemy of that hope. Inflation refers to the decline in the purchasing power of money. Inflation can sometimes happen gradually over the course of decades like it has for currencies like the U.S. dollar and the Euro. In extreme cases, inflation can happen over the course of weeks or months, like in Germany after World War I or in Zimbabwe in the 1990s. The root cause of inflation is an increase in the supply of money. Economists will argue that there are a variety of factors that drive an increase in the money supply. However, at its core, the blame for inflation rests primarily with those individuals who are in a position of power over money.
Inflation has infected various types of money for thousands of years. In fact, inflation is so common and has been around for so long that a lot of people erroneously think inflation is natural and that it has to happen in order for economies to function. As a result, societies look for a variety of ways to protect their wealth from the effects of inflation. This usually leads them to invest in inflation hedges, which are assets that typically rise in value (i.e., price) as the money supply increases. Gold, real estate, and stocks are some of the most recognizable types of inflation hedges. However, investments in things like art and fine wine can also be effective hedges. The investments we’ve mentioned, and all inflation hedges that we haven’t, have one thing in common: their supply increases much more slowly than the supply of even the most tightly limited currency. To this group we add Bitcoin, the newest inflation hedge.