Topic: Bitcoin *is* an inflation hedge in first place. Satoshi expressly made it so. (Read 391 times)

New philosophy has to wait for time, like years
So does new technology

I would add something, it’s not only coin loss that can add to deflation, but also coins that are simply hodld because they’re effectively leaving circulation for an unspecified amount of time.

We probably need 3-4 different metrics to model the supply-side dynamics.

• Total supply (this one is still inflating, but will be completely fixed one day).
• Total „accessible“ supply (this one will be actively deflating trough permanently „lost coins“, but it can never be determined accurately. This would probably drastically slow down over time, the more coins are lost, the bigger the incentive to not lose them, trough coins increasing in value(also requiring demand)).
• “Circulating“ supply (this one can inflate or deflate, depending on current spending behaviors. If more coins are hodld than spent, it decreases. If a lot of long-unspent coins are spent again, it can increase again. The upper bound here is the total accessible supply. I expect the circulating supply to become relatively stable at some far point into the future, when spending/ saving incentives have aligned itself).
• External factors (something like fractional reserving etc).

That’s the problem of letting in arbitrary monetary policy, people will try to fill their pockets/ serve themselves/ fiddle with problems without understanding what they’re doing. And even when a problem genuinely would be fixed trough it, doing it over and over again is like opening pandoras box. Its always the same downwards spiral, a drug they cant get off anymore.

Yes, indeed.  I have seen the same argument raised elsewhere.  Sometimes, unfortunately, it is raised by people who are unaware that there is no reliable way to measure the number of “lost coins”—or even to estimate that, beyond a very vague guess.  Thank you for noting that.  People who keep their coins in deep cold storage for years do not deserve to have their coins presumed lost.

I think that your line of reasoning is obviously correct.  However, it suffers a problem that most supply-side arguments ignore:  Market demand, which is volatile, is oftentimes more important than supply.

Usually, practical dominance of demand-side economics in Bitcoin overwhelm supply-side considerations.  Before the first halving, Bitcoin’s supply-inflation rate was absurdly high!  Between the first and second halvings, supply-side inflation was still extremely high.  But demand grew so fast that the BTC price went from zero to $12.25 by the first halving, and from there to $652.14 by the second halving.  (Source of price quotes.)  As such, Bitcoin has behaved as economically deflationary (price deflation, for things priced in BTC) even when its supply was wildly inflating.

The inverse also applies:  When demand falls, supply-side considerations cannot create value out of thin air.  Many altcoins suffer this problem:  They cargo cult Bitcoin’s supply limitations, or even burn large portions of their supplies^* to try to pump the price; then, they wonder why they fail economically.  Simple:  Nobody wants the coins.

(^* N.b. that the linked essay essentially admits in other words that many tokens have what are, indeed, the key attributes of a security—and that ETH will have those attributes after it switches to POS.  Uh...  Whoops!)

The question of Bitcoin’s practical utility as an inflation hedge is a question of demand growth being greater than or equal to supply growth.  It is very far from market saturation, so I think it is an excellent long-term hedge against inflation.  Betting against BTC now is essentially a prediction that its market is already at or near saturation.  It seems like a very poor bet to me!  And I think that by the time its market approaches anywhere near saturation, BTC supply inflation will be negligible—effectually negative, for the reason that you explain.

Its volatility can compromise its short- to medium-term qualities in this regard; I think that’s what people are complaining about.  People who bought in December 2017, or anytime from December 2020 – early June 2022, who needed to spend money in mid-June through late July, were definitely at a loss—even nominally, never mind inflation.  There is no such thing as a store of value with zero risk of any kind, so I think the solution there is better strategies for handling volatility and risks.  It is very rare for BTC long-term holders to take a loss on long-held coins!

All that being said, I must emphasize:  The titular reason for this thread was a question of whether Bitcoin was intended to be an inflation hedge.  It was.  That is implicit in its design; and Satoshi himself also said as much explicitly.


Probably because with some exceptions, many of the people posting there are just sigspamming.

I posited in the "wrong" topic that there will come a time where Bitcoin effectively becomes deflationary.  People often accidentally lose access to private keys causing sums of BTC become unspendable.  If that rate of loss becomes greater than the rate new BTC enters circulation, then at that point Bitcoin is officially deflationary, but we'll never know for sure when that actually occurs.  Is that a fair premise?  Unless my reading comprehension is failing me, no one chimed in to provide a counter argument to it in the other topic.

No, because they are speculating on Bitcoin as a hedge, whether it be an inflation hedge, or a hedge against the possibility that a non-elected cabal might break the whole financial system with their flawed policies. HODLing Bitcoin is a bet, or an insurance policy against the legacy financial system.


Can you give an example of, "conflicts of interest"?

That didn’t age well.


In my opinion, even more important than Bitcoin’s anti-inflationary hardcap is the reliability and predictability of its monetary policy.

This point has recently been driven home to me by my long-term involvement in an altcoin.  It is an altcoin with excellent, very important new technology—in my opinion, one of the few altcoins that even has a reason for existing.  But the coin itself is economically unreliable.  It started with a monetary policy mostly copied from BTC—with some differences that I believed were well-justified, honestly declared upfront, and known in advance.  I used it for years, without consistently following all of its news; I simply used it as money, just like >99% of ordinary people use fiat currencies without following the details of central bank policies.

While I wasn’t looking, they made some changes to its monetary policy.  Then, they proposed drastic monetary changes for switching to POS.  Meanwhile, because the coin has lost about 97% of its value against BTC in the past five years, there are some shortsighted users screaming for more changes to the monetary policy, to try to pump the price.

I have been left talking myself blue in the face, trying to tell people that people trust BTC because it is reliable.  You can buy BTC, put it into cold storage, go into a coma, wake up years later, and still have the BTC that you bought:  The implementation may change, the technology improves, but the supply and the issuance schedule are carved in stone.

It is why I trust BTC.  It is also why billionaires trust BTC.  So if your coin is failing and falling behind BTC, the answer is to make it more like Bitcoin, not less like Bitcoin.  Think long-term.  Treat the monetary policy as a promise that must be kept.  For better or for worse, the coin committed itself to a Bitcoin-like monetary policy when it was created.  Now, focus on building demand, instead of destroying trust and confidence by making changes on the supply side.

(Do you suppose that my advice is heeded?  What do I know:  I am an awful “Bitcoin maxi”, talking about how great Bitcoin is.)

I myself do not overly idealize Bitcoin’s monetary policy.  I recognize that it makes a design tradeoff, for the reasons stated below.  I even think that there is room for research and experimentation in the monetary design space.  But I recognize the reasons for Bitcoin’s design tradeoff, and the benefits it thus attains; and most importantly, I know that Bitcoin is Bitcoin because you can have confidence that BTC will never make unexpected economic changes that you may disagree with, or that may occur while your attention is directed elsewhere.  It is what makes Bitcoin a virtual analogue of gold.

Now, I think that past commentary can sometimes elucidate a current discussion.  On the general question of Bitcoin economics, and of how its monetary base works in practice, I recently perchance happened across something interesting—by coincidence, these posts were made only a few hours after I registered my forum account:


Economically, no.  Bitcoin evolves technologically; but the BTC monetary policy is absolute, reliable, predictable—trustworthy.  If you disagree with Bitcoin’s economics, please feel free to create an altcoin.  It is permissionless.  There are now tens of thousands of altcoins competing with Bitcoin.  They don’t seem to be doing very well.

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Thanks.


A few more things that many people don’t get:

0. The Bitcoin supply is still inflating.  In its earliest years, especially before the first halving, Bitcoin had an extremely high rate of inflation.  The inflation rate is now low; and in a few years, it will be negligible.  Meanwhile, Bitcoin has already behaved as economically deflationary overall, due to the next item.

1. Many Bitcoiners, and especially many altcoiners forget that supply and demand has two sides:  Supply and demand.  I have seen shitcoiners try to raise the value of their coins by burning a portion of the supply.  It does not do much, if demand is insignificant.  Bitcoin price predictions and especially, 4-year cycle theories commit the same fallacy when they are based too much on the supply side, without adequately considering demand.  Bitcoin’s value has skyrocketed because growth in demand has far outpaced the simple, deterministic rate of increase of the supply.

2. Central banks use monetary policy to control the supply of a currency, and also to manipulate demand.  (Example of the latter:  During the Soros Black Wednesday attack on the pound’s peg, interest rates on the pound were raised to try to stimulate demand for the pound—to encourage traders to hold it.  It didn’t work.)  Satoshi created Bitcoin with a simple, deterministic, absolutely predictable monetary policy baked into the code.  This is a tradeoff:  Bitcoin lacks any means to respond to the market, as some central bankers historically sometimes have in a beneficial way.

The result is volatility.  But this also means that nobody has the power to corrupt the money to the detriment of holders—as many central bankers very often do in a prejudicial way, almost inevitably leeching real value out of innocent people for the benefit of those who least deserve it.  The same design trade-off that makes Bitcoin wildly volatile, also makes it a safe harbour:  The value of your BTC may fluctuate at market, but nobody will suddenly create unexpected new BTC that unpredictably dilutes the value of your BTC.  Which leads me to...

3. Bitcoin arose in an historical context that must not be forgotten.  Most people have short memories; and some people are young.  Those who remember the 2008 global financial crisis will better understand Bitcoin and its economic design.

https://en.bitcoin.it/wiki/Genesis_block#Coinbase


It has happened before.  It has happened many times.  It will happen again.

Only the most virtuous governments can consistently resist the temptation arbitrarily to devalue their currencies, when political pressure (or political convenience) so demands.  Even in societies that used coins made of precious metals, governments would not infrequently reduce the weight of a coin while attempting to retain the same face value, or reduce the purity of the coin by alloying it with base metals, and so forth.  And now, governments and central banks have the monetary “tools” of the worst scam in the history of the world:  Modern fiat money, which has an unbounded susceptibility to manipulation and inflation of the monetary base.

When corrupt governments and corrupt bankers collude to rip off the value of your money, you need some form of money that is not under their control.

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https://bitcointalksearch.org/topic/m.60673804

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Indeed.  ;-)  So many someones are so wrong on the Internet, I need to inflate to supply of me so that I can be everywhere at once, and have the time rebut all of the wrongness.  Alas, the supply of me seems to be hardcapped.

I cannot see any conflict. That Bitcoin is an asset that is somehow protected from inflation doesn't mean its price has only one direction and that hedge fund managers or companies and investment banks couldn't speculate on it. In the first place, Bitcoin is volatile. Bitcoin's price fluctuates all the time. Although generally appreciating, Bitcoin's price is very unstable. It could fall or rise 20% any moment.

As to investment, still there's no conflict at all. On the contrary, having fixed supply means investors are more or less guaranteed that devaluation won't happen.

I don’t think so, it’s just part of markets. It has to coexist with any fishy market participants being there, couldnt really be prevented in any way. Winning really requires overcoming all possible obstacles, there’s no real way to remove them all beforehand. Especially when it’s a human behaviour problem and not a technical one.

Satoshi nailed the core monetary design. Any change there would lead to worse money. There’s still a lot of room for users improving their practices around using Bitcoin.

Question.

Does bitcoin's status as an inflation protected asset conflict with it being an asset of speculation for hedge funds and investment banks?

Satoshi did an incredible job developing bitcoin. But I wonder if there were some conflicts of interest, which he himself did not anticipate. In which case, it is possible that there is room for improvement as far as BTC design and development go.

Indeed.  Having a dwindling block reward instead of an infinite one screams inflation hedge.  One of the first things I looked into when discovering Bitcoin was the total supply (so that I could calculate market cap) and discovering that it was capped at 21M was the first successful "sniff test" that Bitcoin passed.  If it wasn't for that 21M cap, I would have probably never looked into Bitcoin more than that first day.  For me, being non-inflationary over the long term was the #1 selling point of Bitcoin upon first learning about it.

Definitely, i would add that for short term trading assets like gold, gas or oil, theres no practical way around trading digitally trough derivatives etc. So they probably wouldnt buy actual gold or oil, but just an abstraction of a real world asset. The costs/ work required to hold and sell resources like this physically would be way too high, especially for retailers.

If most trading is done digitally anyways, then its hard to even consider other assets in place of Bitcoin, as i dont see any asset that can even compete with the ownership rights granted by Bitcoin. The choice between a gold derivative, oil derivative or Bitcoin is obvious. You only really own one of them, and you can only send one of them in a worldwide fashion without a middleman. Gold can be held physically, but then were back to the problems of using gold as a medium of exchange.

Only Bitcoin really solved ownership and transferability, in a digital-ready way. Once people realise that practically all markets operate digitally now, they have to realise that no other asset can really offer both like Bitcoin can. Its already miles ahead. Our money in our bank account, our assets on exchanges can be viewed more like liabilities the bank/exchanges owe us. There is counterparty risk. Not true ownership.


Thats fine, in the here and now an inflation hedge would then be something that currently has supply issues and something people are dependent on, regardless of the price. Food, oil, gas etc. Which goods exactly, varies by the situation. Which is tricky in a situation where people are already struggling. Making money on peoples struggle comes with ethical conflicts, and would even worsen the situation more. Theres no real asset that would always pump in there here and now regardless of the situation, so universal inflation hedges dont really exist(by the in the here and now definition) and then its tricky if such situations should even be used for personal gain. Im strictly against it, but ik many people are fine with it, because its part of the game. Each to their own.

Really, any scarce asset is an inflation hedge if its value is not tied to the value of a fiat currency.

By not pegging the value of a Bitcoin to a fiat currency like other earlier attempts at cryptocurrencies and by limiting the number to a finite amount, Bitcoin was explicitly created as an inflation hedge.

That's the always valid point that most people seem to forget though -- no matter the hedge, those who transfer fiat out into alternatives (including Bitcoin) will prioritise expenditure/maintenance over investment. Especially for retail investors (who wouldn't be buying oil, gas or gold as easily as they would BTC) who'll be putting food on the table first over Bitcoin in the wallet -- speaking for myself anyway.

So the appreciation is long-term for sure, but that to me does nullify it as an inflation hedge (at least in the here and now).

Countries are even starting to refuse buying russian gold.


This is just a matter of time tho, when theres less money being pumped into markets like now, and people are lower on money due to inflation, it’s clear that we won’t see Bitcoin pumping up, just because there’s more inflation. So first we’re seeing many assets actually coming down when it first starts. We would see the anti inflation curve happening when trust into the dominant currencies eroded and people try everything they can to save their money from it, but this didn’t happen yet.

So we gotta use longer time horizons, let’s just take last 3 years as reference because in the beginning of 2020 it was clear that major money printing is going to occur. So from that point on market participants could’ve looked for an inflation hedge specifically, even long before inflation gets bad. But it was already foreseeable from that point on.

• Gold appreciated by 21%.
• Bitcoin appreciated by 143%.
• Oil appreciated by 81%.
• Natural gas appreciated by 274%.

We can see that commodities like natural gas, that are short in supply in certain countries, are shooting up in price in the short term during certain market conditions(hard to foresee). Things that people have to buy regardless, aka inelastic demand. But these increases are oftentimes only temporary. Natural gas prices were higher in 2008 than now, while Bitcoin keeps appreciating consistently in value.

In the short term there can be some opportunities that can outperform Bitcoin for people that can anticipate it correctly, but Bitcoin is a safe bet even here. But in the long term a money with absolute scarcity will hedge the best.


It’s really necessary to have a hedge beforehand, otherwise it would be too late when it actually happened. That’s what many people don’t realise.

Bitcoin is a hedge, but not a mere financial hedge. It's a back up/fall back against a non-elected cabal that makes/creates policies that expand and tighten the money supply, which truly is not sustainable. The fiat system will definitely collapse within itself. It can be debated that, "It would not be today", but my reply to that would be, "Better to be ready, and HODL Bitcoin".

Still not sure I understand economics enough to use the full label of inflation hedge.

Agree Bitcoin has deflationary pressures built it or baked in as people say these days. Agree that over medium and long term, it is inflation resistant.

But in my mind a hedge is something that is anti rather than resistant. So I dont necessarily see Bitcoin as a hedge, though perhaps it is semantics I don't get.

They'd have to be corrected because somehow, it keeps me up all night if they are still misinformed.  Do not delete it, I'm with you.  




Which they need to wait for two cycles to feel safer from inflation. Regardless, it's true though in fact if I bought it in 2017 at $19K means I've already profited $4k if I haven't dumped it yet. Due to the limited supply of BTC, it's by far the best choice to go than gold.

For all the "gold fools" reading this:

You're telling us that gold is a very nice inflation hedge... can you buy anything with it? Of course not (except for more dollars). We've managed to create a form of money that is actually used as a payment currency.

[Do you see cash-strapped Russia selling oil for gold? Of course not. It goes to show the limitations of gold as a medium of payment.]

Regardless of what Satoshi said, it is clear that bitcoin is an inflation hedge and has been the best inflation hedge in the world since its inception. The ridiculous thing is to see people denying it because of the price drop from 69,000 to 17,000 USD that has coincided with a general downturn in the markets, like many previous downturns, but the fact is that whoever has bought and held bitcoin for at least one cycle has been better protected from inflation than if with the same money they had bought gold, stock market, etc.


Even if I hadn't said so explicitly, the cap limit and the halvings are anti-inflationary, no matter what the influencers say.

I like the idea of having correcting threads.

So to the point, I’ll just add some obvious information for potential newbies reading this:

If we define the effects of inflation as a resulting loss of purchasing power over time, and Bitcoin is a form of money that is provably increasing in purchasing power over time -> Then it’s just obvious that it is hedging against inflation.

What some people might not get is that every traded asset underlies market forces regardless, and Bitcoin specifically is also kinda cyclical. The point is: it won’t appreciate when you want it to, and the market might have already priced suspected events in beforehand. So to any newbie reading this, if you want to use Bitcoin as a hedge against inflation you also gotta hold it over longer periods of time, you can’t just go in when inflation is already at its worst and then expect Bitcoin to save you. That’s not how markets work. Time in the market beats timing the market, and you will have to operate on a being one step ahead basis.