Bitcoin, The Last Bulwark Against Inflation

Since the beginning of the year, inflation has hit the world. Households are paying a heavy price in the face of widespread price increases. Purchasing power is melting like snow. Why are currencies, especially the euro, collapsing? Will Bitcoin finally live up to its promise to beat inflation? All the answers in this article.

Inflation is now unstoppable

Inflation is at an all-time high around the world. Last June, the inflation rate in the United States hit a record high not seen in more than 40 years. The price increase in Uncle Sam’s country exceeded 9.1%. Meanwhile, in Europe, we were witnessing a similar situation, with a price increase of 8.9%. This situation is far from over and does not bode well for the coming months. Winter is coming!

The current economic meltdown, which has all the hallmarks of a recession, is mainly driven by rising prices for energy, housing, agricultural products, etc. In one year, American households have had to bear a 12.2% increase in food prices. Such a situation has not occurred since April 1979.

On the other hand, on the old continent, the energy crisis is not sparing any country. Gas is no longer cheap. Already at its highest since the beginning of the year, the price to pay for heating could double in the coming months. Many energy distribution companies are announcing a bill increase of more than 70% as early as November, as you can see on the picture below.

A bigger bill than usual, thanks inflation
A bigger bill than usual, thanks inflation

This is due both to the poor energy policy in Europe, but also to the closing of part of the Russian gas tap as a result of the Ukrainian conflict.

As a result, the euro is collapsing at a speed never seen before. The union’s currency is on the verge of falling below one U.S. dollar. While it was trading around 1.18 USD only a year ago.

1 euro is worth 0.96 USD at the time of writing.

Europe more affected than the US

Europe is being hit hard by the current economic crisis and it’s only just beginning. Winter is looking colder than ever.

Meanwhile, the euro is collapsing like a good old shitcoin. Last July, Le Figaro reported a price increase of 8.9%. According to some analysts like Charles Gave, this is not going to stop just yet.

The European continent is close to bankruptcy. If inflation in France is hovering around 6%, it exceeds 20% in some other countries such as Estonia, Lithuania or Latvia.

The Italian economy is on the verge of collapse. If such a scenario becomes reality, we could be witnessing the beginning of the end for the 27-member union.

But why are our economies collapsing?

To understand what is happening to us, let’s go back in time to the Covid-19 crisis. The series of confinements around the world slowed down the economy dramatically. To stop the bleeding, radical measures were taken on both sides of the Atlantic. Central banks turned on the printing press to flood the markets with money created ex nihilo (out of nothing).

With covid checks, subsidies to companies in difficulty, stock market buybacks, the helicopter money flooded all sectors with cash. This triggered an explosion of the money supply in circulation.

The abundance of monkey money on the market, combined with the sharp decline in the production of goods and services, was bound to lead to a generalized rise in prices worldwide.

In Germany, for example, the cost of production is up by more than 45%. This will certainly have a considerable impact on the cost of living in the coming weeks.

Banks’ measures to curb inflation

Central banks are trying to organize the offensive against the galloping inflation.

The Federal Reserve (FED), the American central bank, has decided to raise interest rates. This means that borrowing is now more expensive than it was a few months ago. The immediate effect of this measure is a decrease in money creation through debt.

The less money there is on the market, the more the price of goods and services is bound to fall, which has the effect, in theory at least, of increasing purchasing power.

Last July, the price of some commodities, usually cereals, fell on the market. However, it is unclear at this point whether this slowdown is due to rising interest rates or to the resumption of grain exports by Ukraine.

Banks promise a return to normal. According to a survey by the New York Fed, inflation in the United States will reach 3.6% within the next three years.

However, let’s be cautious about central bank forecasts. Indeed, not so long ago, Christine Lagarde, President of the ECB, promised an inflation rate of maximum 2%.

Nevertheless, it is certain that by maintaining the tightening of monetary policy, the inflation rate could stabilize in the short term. Central banks seem to agree on this point. After the US FED, the ECB raised the key rate by 75 points.

However, the fundamental problem with money is far from being solved. As long as money is based on nothing but trust in central banks (it has been since 1971), our economies are bound to collapse. In the future, a total collapse cannot be ruled out.

Bitcoin to save us all from the coming financial cataclysm?

Bitcoin to save us all? Isn’t that utopian for an asset whose price has fallen from 68,000 USD since November 2021 to 19,000 USD?

As you can see from this tradingview chart, the price of bitcoin has plunged with the rest of the market. It has lost over 60% of its value in less than a year.

Bitcoin our last defense against inflation?
Bitcoin our last defense against inflation?

Let’s face it, Bitcoin has failed to protect its users from the current inflation. The price movements of the queen of cryptocurrencies are highly correlated to the Nasdaq.

However, Satoshi Nakamoto‘s invention has proven its resilience over the long term.

As illustrated by the chart above, bitcoin is arguably one of the most profitable assets of the last decade. However, this does not prevent its price from remaining very volatile.

Indeed, being a very young asset, bitcoin is subject to high volatility. It is usually caused by the influx of new users. For this reason, bitcoin is not a perfect short-term store of value. In addition, its long-term holders have the benefit of keeping their savings safe from inflation.

The disinflationary nature of bitcoin makes it a store of value that could compete with gold in the future. Buying it at the current price is making that bet. The next few years look bleak for savings. It would be very naive to underestimate the capacity of central banks to repeat the same mistakes. If Nakamoto’s invention succeeds, bitcoin holders will certainly be among the few survivors of the economic crisis that is shaking our economies.