The Problem With Fiat And How It Affects Bitcoin

Fiat currencies have lost its valuation over time. Since 1950, dollars have lost over 90% of their purchasing power due to the ongoing problem with inflation and central banks printing more money to cover past problems. This problem has been publicly known and acknowledged by most people in the society for decades, but nobody knows how to properly fix it.

And now, this problem has been exaggerated even more due to the ongoing coronavirus pandemic. While we might be able to see the light at the end of the tunnel of this pandemic, the economic damage is already here. It’s inevitable. And the central bank’s response? Print more money.

Unlimited Bond-Buying Plan Might Be Able To Reduce The Economic Pain

The Federal Reserve in the United States announced that it has “unlimited supply” of US dollars to buy as many bonds as needed to calm the market - you can find the report here.

This announcement was already expected by many analysts as federal governments don’t really have a plan how to save the economy except by going into more debt or by printing more money. While the US can easily print more money due to how USD is being used as a reserve currency of other international banks, it still would cause inflation in the longer term - doesn’t matter how you spin it. The bad thing is that if the US has worse inflation, other countries might get affected even worse.

Why? Because these new printed supplies would have to end up somewhere. When many people already go back to work (and they will, sooner or later), obviously, these new printed supplies cannot just be “burnt” at will. And as usual, when there are more available dollars in the circulation, the purchasing power of each dollar would become less.

Bitcoin Has The Exact Opposite Mechanism

Unlike dollars and other fiat currencies, Bitcoin adopts the opposite approach. It has a mechanism where its maximum supply is capped at 21 million. Not only that, the mining reward is halved every (approximately) 4 years. So, when Bitcoin gets more popular, the idea is that there will be less BTC dumps on the open market due to less accessibility to new supply.

And for this reason, Bitcoin is often seen as the hedge against fiat currencies. After all, it was launched after the 2008 global financial crisis. Its creator, Satoshi Nakamoto, expressed several times on how the history of fiat currencies is full of breaches of trust. You can learn more details about how Bitcoin works on this article.

What Does The New Problem With Fiat Say About Bitcoin?

2020 is the most interesting year in our crypto history. Even though Bitcoin was invented after the 2008 financial crisis, it never actually faced a global crisis in its history. Bitcoin’s biggest rise was in 2017, the year when the global economy was actually doing okay.

2020, on the other hand, is the year where many people become financially vulnerable. Many people are not allowed to go to work and many businesses already lose 80-90% of their revenues. It’s claimed that the financial impact that’s caused by COVID-19 would follow even after we successfully suppress the current pandemic. 

The economic damage would need time to be reserved - and as mentioned above, the new fiat supplies that were printed by the Federal Reserve would cheapen the valuation of each dollar, and the effect would be much more obvious during the time of recovery.

Theoretically, this means that Bitcoin price should be able to go up against fiat currencies. Why? Because now it’s already much harder to get Bitcoin mining rewards compared to 5-6 years ago while fiat supplies have been increasing massively. So, assuming the demand for Bitcoin remains the same more or less, Bitcoin price should be able to go up against fiat currencies in the long term.

Nothing Is Certain

Even though the theory above sounds interesting, keep in mind that nothing is certain in the crypto space. Yes, it’s true that it’s harder to dump new supplies of Bitcoin due to much less mining reward (you can learn more about how the BTC halving reduces new supply - check it on this link). Yes, it’s also true that fiat currencies’ valuation would become less in the future. However, remember that liquidity in the crypto space is still low. 

For Bitcoin price to go down against the USD, you only need some whales dumping their BTC holdings at the same time. And the chance for that scenario to happen is never small. So, yeah, always trade cautiously, and don’t invest what you can’t afford to lose. BTC can still go both ways even though in the long term it should become more expensive (once again, assuming the demand for crypto is still there).