In the 4/5/2021 Weekly Blogue, I touched on how Bitcoin and Ethereum are the top 2 most relevant cryptocurrencies from a public perspective as well as from a market cap perspective. In order to understand why Bitcoin was introduced, one first needs to understand the history of the U.S. Dollar and the power it has given central authorities.
The U.S. Dollar was introduced in 1914 and effectively went off the Gold Standard in 1933 when President Roosevelt removed the dollar’s connection with gold. The reason for this was that the government felt the need to stimulate the economy coming out of the Great Depression and to do so, they needed to remove any connection with Gold (which has a very restrictive supply). As a result, they now had (and still have) the ability to infuse mass amounts of money into the economy, similar to what has been happening at a rapid pace over the last year.
At this point, the government had full control of the U.S. dollar and in effect could print it at will, therefore increasing the supply of it (M2 supply). They had little to no rules in terms of financial responsibility.
Then in 1971, President Nixon abolished the Gold Standard for good ending the foreign government’s ability to exchange their dollars for gold therefore making gold essentially obsolete.
Before I go any further, take a look at the below chart. As you can see over time, the ‘purchasing power’ of our dollars has gone down dramatically since 1933. This trend sped up in 1971 and then significantly began deteriorating in the early 1980s.
What is ‘purchasing power’ and why does it matter to each and every one of you? As defined by Investopedia:
“Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy.”
In short, it’s what your dollars can buy and over time, we’ve been able to buy less and less with our dollars. These are your hard-earned dollars that the government has just made worthless over time by their endless printing of money.
Money (M2) Supply
What is the, ‘money (M2) supply’ and why does its insane increase over time matter? As defined by Investopedia:
“The money supply is all the currency and other liquid instruments in a country’s economy on the date measured.”
Simple enough definition, right? We’ll touch further on this but first, let’s take a look at the chart below by Federal Reserve Economic Data (FRED). This chart is utterly laughable and as you can see the sharp upwards increase starting in 2020. I fully expect this line to continue moving up at a similar trajectory for the foreseeable future.
Also, note how incredibly well the purchasing power chart above and the M2 supply chart below have moved in opposite directions over time.
The government and central bank have led this surge in the money supply via tactics such as quantitative easing (the act of buying long term securities from banks), keeping interest rates artificially low, and as of late just handing money out to Americans across the country via fiscal stimulus.
Artificially Low Interest Rates
The most common and direct effect of drastically increasing the money supply is that it decreases interest rates. Not only does the money supply decrease interest rates in and of itself but the central bank has, on its own, artificially suppressed interest rates.
Artificially low interest rates promote investing and consuming now vs saving for the future. As a result, it makes zero sense to invest your money in ‘safe’ and ‘risk-averse’ assets and has essentially become the same as keeping our money in checking accounts. However, keeping our money in a checking account actually results in a deterioration of our wealth as illustrated in the purchasing power chart.
So where does all the money flow to? Risk assets (aka the stock market). Yes, since early 2009, investing in the equity markets has produced very handsome returns with the Nasdaq, S&P 500 and the Dow Jones (three major indexes) appreciating 900+%, 450+% and 375+%.
In my opinion, this has become almost a gigantic bubble of fictitious wealth and as soon as expansion slows or it doesn’t pick up (as expected coming out of this pandemic), it will cause a major ‘burst’. There will be a deflationary spiral where this wealth generated in the equity markets evaporates rather quickly and as this ‘wealth’ disappears, a run on the banks ensues as banks struggle to meet its obligations.
Enter in Bitcoin
In summary, all of the glaring and honestly scary issues I touched on above are all due to the U.S. dollar and unlimited power by a central authority to control it.
Bitcoin (BTC) was created in 2009 by a Satoshi Nakamoto (still not identified to this date) and its creation was the world’s introduction to the first digitally native currency. Nakamoto’s vision was for BTC to be a pure form of peer-to-peer digital cash that doesn’t require a central authority or middleman and whose supply cannot be manipulated and extended by a higher power.
There are vast amounts of technical aspects to Bitcoin that I will touch on in blogs down the road but the key aspect that has turned me onto Bitcoin is its restricted supply. The quantity of BTC created is preprogrammed at 21 million tokens and it can’t be altered. This trait makes Bitcoin a very attractive ‘store of value’. Why? Think about how the government’s constant manipulation of the dollar has led to storing the dollar to a value-deteriorating action.
Bitcoin’s whole value and usage all depends on adoption. As more people buy Bitcoin with the intent of storing it, the value of the currency rises. As the value of the currency rises, it makes its proposition as a store of value that much more attractive. Pure network effects.
There are other aspects to Bitcoin that make it very attractive which will be addressed over the next few weeks/months. However, this article’s purpose was to shed some light on the government’s past U.S dollar manipulative actions and how it’s at the peril of the U.S. citizens, the same people that the government is supposed to look out for.