With all the mayhem going on in presidential politics it’s easy for Bitcoin and its role as a currency to get lost in the shuffle. With prices fluctuating near all-time highs and proponents placing lofty 5X and 10X values on it, one should not ignore it as an asset class to add to your portfolio. Especially in light of the recent comments by former President Trump that “We want all the remaining Bitcoin to be made in the USA!” Bitcoin as a reserve asset has the potential to be anti-inflationary, as it could be coupled with other hard currencies and be used to back the U.S. dollar. Bitcoin has evolved from a niche interest to a mainstream financial asset, raising questions about its impact on traditional economic indicators such as inflation and the U.S. dollar.
Bitcoin and Inflation
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Traditional fiat currencies, like the U.S. dollar, are subject to inflationary pressures due to factors such as monetary policy, supply and demand, and economic conditions. Central banks, like the Federal Reserve, manage inflation through tools like interest rates and money supply adjustments.
Bitcoin, on the other hand, has a fixed supply of 21 million coins, making it inherently deflationary. This limited supply means that, unlike fiat currencies, Bitcoin cannot be devalued through excessive printing. As a result, some proponents argue that Bitcoin can serve as a hedge against inflation. During periods of high inflation, investors may turn to Bitcoin as a store of value, similar to gold. This behavior was observed during the COVID-19 pandemic when unprecedented monetary stimulus led to concerns about future inflation, driving interest in Bitcoin.
Bitcoin advocates argue that allowing central bankers to influence the economy through monetary policies (like quantitative easing) leads to disaster. Rampant money printing by central banks in countries like Venezuela, Turkey, and Zimbabwe has wreaked havoc on their economies. Bitcoin, with its decentralized and limited supply, stands apart from traditional fiat currencies. It’s seen as a potential safeguard against inflation, allowing individuals to protect their wealth without relying on banks. The following graph depicts the relationship between Bitcoin and inflation.
According to Michael Ashton, inflation consultant and JPMorgan alum, “That’s part of the crypto argument. They say, we’re gonna limit how fast cryptocurrency supply can grow and since we are printing all these dollars, then that means that the dollar has to depreciate a lot relative to crypto. Therefore, the price of crypto should rise over time.”
Bitcoin and the US Dollar
The U.S. dollar is the world’s primary reserve currency, used in international trade and held by central banks as part of their foreign exchange reserves. The dollar’s dominance is supported by the size and stability of the U.S. economy, as well as the trust in its institutions. As much as Bitcoin proponents would like to believe that it will one day replace the dollar as the world’s reserve currency, what may be more likely is that it will ultimately be used to make the dollar stronger. As mentioned, classifying Bitcoin as a strategic asset would facilitate the process. Politicians, like Trump and others, are starting to lay the groundwork to incorporate Bitcoin with the more mainstream fiat currencies.
Former presidential candidate Vivek Ramaswamy, for example, has been advising President Trump on Bitcoin and digital assets since January. Independent presidential candidate Robert F. Kennedy, Jr., while obviously not advising Trump, also has plans that include Bitcoin. Ramaswamy has proposed using a basket of fiat currencies, in addition to Bitcoin, to back the greenback, similar to when the U.S. was on the gold standard. Like Ramaswamy, Kennedy proposes that treasury bills could be backed hard currencies and Bitcoin. The idea here is that by tying deflationary assets to the dollar, you could eliminate or alleviate inflation. Others like Senator Cynthia Lummis have suggested using Bitcoin to diversify the Fed’s balance sheet of foreign currencies.
Moreover, Bitcoin’s growing popularity as an investment asset could influence the demand for the U.S. dollar. As more investors allocate a portion of their portfolios to Bitcoin, as when buying treasury securities, the demand for dollars to purchase Bitcoin increases. This dynamic can create upward pressure on the dollar’s value in the short term.
Bitcoin’s impact on inflation and the U.S. dollar is complex and will likely depend on its overall adoption by retail investors as well as central governments. While its fixed supply and decentralized nature offer potential benefits as an inflation hedge and alternative to traditional currencies, its price volatility and nascent adoption present challenges. As the cryptocurrency market matures and regulatory frameworks develop, the true extent of Bitcoin’s influence on inflation and the U.S. dollar will become clearer. For now, Bitcoin remains a fascinating and disruptive force in the world of finance, with the potential to reshape the global economic landscape. Bitcoin $1 million?
