Is Bitcoin A Good Choice Under Perennial Inflation?

2023-03-23, 07:14

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In this dilemma, the Federal Reserve (Fed) has chosen the path of "suppressing inflation." Earlier this morning, the Fed announced a 25 basis point hike in the benchmark federal funds rate to a target range of 4.75% to 5%. Fed Chairman Powell hinted that interest rate hikes have come to an end and may only be raised once this year, but "we will not see a rate cut." After the news came out, regional banks such as the First Republic Bank plummeted during the session, and the three major stock indexes took back all their daily gains and turned them down. As of closing, Bank of America and Wells Fargo fell 3.3%, JPMorgan Chase fell about 2.6%, and Goldman Sachs fell 1.1%. The current situation reflects the gradual increase in the probability of a recession in the United States and the uncertain direction of the market. The funds that should have flowed back may have flowed into gold, cryptocurrencies, or other countries.

##Is Hyperinflation Far From Us?
When the amount of currency issued by a country is greater than the amount of currency in circulation, it will lead to price increases, currency devaluation, and inflation. In fact, the number of currencies around the world has been increasing since the moment there was a "fiat currency." Because in order to promote economic growth, countries are moderately over-issuing currency to stimulate consumer behavior. This is benign inflation.

Hyperinflation is a state of runaway inflation, with prices rising rapidly and currencies losing value. According to Wikipedia, hyperinflation is generally defined as a monthly inflation rate of 50% or more, while most economists believe that "an inflation cycle without any balanced trend" is hyperinflation.

During World War I, when Germany was defeated, the authorities and governments were unable to afford the financial expenses of the signed reparations treaty and had to choose to issue a large amount of currency. In 1923, the authorities and the government issued about 50 trillion marks (formerly German fiat currency), plunging Germany into the abyss of hyperinflation. In 1914, the exchange rate between the dollar and the mark was only 1:4. In November 1923, the exchange rate between the dollar and the mark soared to 1:4.2 trillion marks, and a single piece of bread would then cost 20 million marks.

![](https://gimg2.gateimg.com/image/article/167955535011.png)
Using bundles of Mark as a toy is much cheaper than buying a toy - Network

There is also Venezuela, which was once predicted by the International Monetary Fund to have an inflation rate of 1,000,000%. In December 2021, the country's inflation rate reached 686%, and more than 3 million Venezuelans fled the country. Hyperinflation not only led to the collapse of the country's financial system, but also led to a humanitarian crisis.

![](https://gimg2.gateimg.com/image/article/167955539222.png)
In August 2018, 2,600,000 Bolivars were able to purchase a roll of toilet paper - Reuters

##The "Pandora's Magic Box" Opens, Leaving the United States in A Dilemma
In March 2021, US President Biden's $1.9 trillion "bailout bill" was passed in the Senate, with the content of distributing $1,400 per eligible American citizen. The huge rise in the yield of US 10-year treasury bond bonds is largely due to the impact of the bailout bill.

Soon, an economic boom began. Whether rich or poor, everyone had a check to consume. As a result, a large number of deposits flooded into banks. When some regional banks obtained such a large amount of deposits, they would use these deposits to lend and increase their income by assuming certain credit risks (non-repayment by borrowers is referred to as credit risk). Generally speaking, most banks avoid credit risk, but they want to expand their earnings. Therefore, they choose to borrow money from various US government departments to limit risk and increase interest income by purchasing bonds with longer maturities.

In March 2022, the inflation situation in the United States remained unabated. The Fed took interest rate hikes from 0% to 4.58%, and is expected to raise interest rates to 5.5% this year. The move of the Fed’s interest rates hikes led to a sharp depreciation of the US treasuries and residential mortgage-backed securities purchased by regional banks (such as Silicon Valley Bank), and banks began to lose money.

![](https://gimg2.gateimg.com/image/article/167955542333.png)
Since 2022, the Fed has raised interest rates to 4.58% - ycharts

Those companies that borrow from banks can't afford rising interest rates, so they have to lay off significantly. Meanwhile, because it is difficult to obtain investment from investors, enterprises can only withdraw money from bank accounts to maintain operations, which has led to a liquidity crisis in banks. In the end, the liquidity crisis superimposed losses, and the result was the successive failures we witnessed some time ago.

![](https://gimg2.gateimg.com/image/article/167955545344.png)
The Fed's tightening cycle is the fastest on record - NDR

The US monetary and fiscal policies have added a large amount of hot money into the market in the past two years. Now, the "Pandora's Magic Box" has been opened. On one hand, interest rates cannot be stopped because of the need to curb inflation and preserve the value of the US dollar; On the other hand, the interest rate hikes continue, which may cause more bank failures, market shocks, and the financial crisis to unfold again. As Satoshi Nakamoto wrote in the declaration on the Genesis block: "On January 3, 2009, the Chancellor of the Exchequer was on the verge of implementing the second round of bank emergency assistance." Central institutions manipulated currency issuance to create false prosperity. On the day when the bubble was too big, the economy would eventually encounter a "hard landing". The price of a "hard landing" is the calm life that people should have.

##Is <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> A Good Choice?
From the perspective of asset diversity, whether we are facing "<a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>" or "Bitmine" or other emerging assets with various names today, dispersing our investment principal among different assets is an effective way to reduce risk. Here we focus on the unique features of <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>.

First, let's try to imagine a day without <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> in the future:

1.You were woken up by the alarm at 7 o'clock. Today is the rent payment day, but you can't figure out why the rent has increased year by year, while your salary has never increased.

2.After your morning routine, you go to the coffee shop to buy a cup of coffee. At this point, the price of coffee is already in the triple digits, and you are hesitant. If you drink this cup of coffee, your lunch budget will be halved.

3.You turn on your computer at work and search on Google for 'How to invest and manage money?' and 'Why are prices soaring?' You find that the search results are filled with people who have the same doubts as you, but few people answer. In general, centralized institutions control currency issuance, and "they" will follow suit.

Is there a deep sense of powerlessness? Fiat currency is like an invisible rope that binds people to order, and you have no choice but to comply, because there is no other choice.

At this point, <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> appeared. The emergence of <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> has not changed the operating system of this society, but you have a choice. You can get rid of the manipulation of centralized institutions, because <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> is not what they determine it to be, but what everyone in the market determines.

In addition to being free from centralized institutional manipulation, <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> is a relatively independent market and a preferred option for all "indecisive" investors, which is also one of its risk aversion characteristics. Taking the current market situation as an example (the Fed's interest rate resolution on March 22 has not yet been released), at this time, investors' expectations of the Fed's interest rate increase are in a state of hawkish or dovish ambiguity, and betting on either side has a high risk. Just like rolling dice, the dice are in a rotating state, and no one knows whether the final result is large or small. In this state, investors are more inclined to invest in relatively independent markets, such as <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>.

##Will A Central Bank Digital Currency Be A Better Choice?
According to the Atlantic Council CBDC Tracker, except for two countries that have explicitly canceled CBDC projects (Ecuador and Senegal), there are currently 119 countries exploring or introducing the central bank digital currency (CBDC). Among them, the Asia Pacific region is the most prosperous region, with countries such as China, Singapore, Japan, South Korea, Australia, and Russia all in the pilot stage.

![](https://gimg2.gateimg.com/image/article/167955582766.png)
Source: Atlantic Council CBDC Tracker

<a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> Analyst Josef Tětek believes that CBDC has a series of characteristics that are of interest to authoritarianism, in particular providing issuers with direct control over national digital currencies, which allows issuers to arbitrarily impose negative interest rates and even directly tax people's accounts. Meanwhile, CBDC can also serve as a tool for monitoring and censoring people, and rulers can easily freeze the funds of people who disagree until they act in a manner that meets the expectations of the rulers.

##To Sum Up
*"When we are under tremendous pressure to obtain fiat currency every day, the currency is still depreciating." - Michael Saylor*

<a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> never creates money, but rather creates choice opportunities.

<div class="blog-details-info">
<div>Author:**Jill Ma**, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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