TL;DR
- Inflation reflects a diminishing purchasing power of a currency
- Fiat currency has proven to be a poor store of value, as it’s subject to centralized inflationary policies
- Bitcoin is arguably a strong alternative to, or supplement for, cash as a store of value.
- Dollar Cost Averaging is a popular investment strategy for moving cash into bitcoin over time without worrying too much about volatility.
What is inflation?
Inflation, simply, is an overall rise in prices in an economy. This rise reflects a diminishing purchasing power of a given currency.
Economist Milton Friedman argued that inflation is purely monetary — determined by policy and printing of new money by centralized bankers. Subscribers to this popular theory refer to inflation as a “hidden tax” from central banks.
What does this mean for you?
Well, if you’re holding US Dollars — in your bank account, pocket, lock box, or mattress — they’re worth less now; 7.5% less than they were a year ago. You’ve lost purchasing power by simply holding your hard-won earnings.
People living in countries outside of the US, especially under authoritarian regimes, are very familiar with the nightmare of inflation and how monetary policy can cause populations to go bankrupt almost overnight.
Diversify your holdings
If you’ve ever wondered why you can’t simply hold your cash to avoid the ups and downs of investment markets, now you know.
Cash is still good for some things, but not as a primary store of value.
If you’ve read up on investing even a little, you’ve heard the term “diversification.” Diversification means investing in multiple places to limit your exposure to a particular asset’s risk profile. It’s designed to reduce the volatility of your portfolio over time.
Bitcoin as investment, and store of value
Bitcoin is often referred to as a “hedge against inflation.” While fiat currencies (such as USD) can be printed, and often are, Bitcoin has a fixed supply of 21 million BTC.
Bitcoin is decentralized, and can’t be controlled by a small group of decision-makers in a particular economy, nation, or class.
Bitcoin vs. Gold
Bitcoin is frequently compared with gold as a potential hedge against inflation and a store of value solution. (Remember, the value is what we need to store, and with cash the value can be easily manipulated. Cash is actually a very poor store of value.)
What gives bitcoin the edge over gold is its ability to be moved rather quickly over distance.
While the debate over bitcoin vs gold is still on, there’s another way to conceptualize bitcoin here — bitcoin is gold for the internet. It has the exact qualities needed to serve as a store of value within a global, borderless, digital economy.
Bitcoin investing strategies
There are a couple popular approaches for changing your USD into bitcoin: timing the market and Dollar-cost averaging.
Timing the market can be time consuming as it often involves news tracking, price analysis, and a steep learning curve. And it’s not a proven method by any means. As we’ve seen in the past month, even the practice of “buying the dip” can be a stressful experience when that dip keeps dipping before bouncing back.
Another popular and less time consuming way to invest is Dollar Cost averaging. With this method, you can change your USD into bitcoin a little at a time, over time, at regular intervals. This is said to create a stabilizing effect on bitcoin’s average price and protect against volatility.
You can even automate your DCA by setting up a ‘recurring buy’ with an exchange. Okcoin offers recurring buys with daily, weekly, and monthly investment intervals.
Bitcoin and beyond
With inflation’s rate and reach growing in the US, this is the perfect time to explore Bitcoin and other crypto assets as a way to diversify your holdings and set yourself up for a solid financial future.
