You should have trusted Bitcoin just a little bit!
My disclaimer before I even get into this article, I have been regularly buying and selling Bitcoin (even though in small amounts) since 2017.
My initial and a large part of my love for Bitcoin is not monetary but purely ideological. And the pandemic has had an multiplying effect on that same ideology, which is:
It annoys me how conveniently government print money which devalues my savings and they do so without even asking me or us; and as a result I have to live with the consequences of that action. I pay almost 60+% in direct and indirect taxes and add monetary inflation (about 20% in US), what’s really left for me?
Money printing leads to an increase in money supply (more $,€ etc. in the market), which means that there is more money chasing the same basket of goods and services. In other words, money printing decreases the real value of your money. This increased money supply also is why stock markets are rising so high, as central banks lend to commercial banks who in turn lend to their buddies (funds, other banks etc.) who are usually the rich folk who invest heavily in markets.
The U.S. money supply has grown 20% from $15.33 trillion at the end of 2019 to $18.3 trillion at the end of July 2020.
What that means is that the value of your money has depreciated by 20% in less than six months — this is an indirect tax government’s levied on us during the pandemic. And the increase in the Federal Reserve balance sheet illustrates just that.
So I wanted to find a way to protect my savings and invested a bit of my savings into Bitcoin as a hedge against any loss in the real value of my savings due to all this money printing.
Bitcoin is a fixed quantity asset and yes, it cannot be used efficiently as a currency, and like gold & other precious metals it cannot be used in jewellery or smartphones but it solves a very big problem we are facing today — loss in the real value of our savings.
Bitcoin as an algorithm seemed more honest to me than a politician and that’s why I trusted and still trust it. In fact, that’s what the founder of the currency aimed to achieve — no intervention, just pure money that does not depreciate at least due to the effects of money printing. If it does fail, it would be due to human intervention which as the days goes by is seeming more unlikely.
But let’s say you were still skeptical about investing into Bitcoin after all these arguments but I still somehow managed to convince you to invest only 2% of your savings into it about a year back and the rest you could put into the trusted S&P 500 index — so what would have happened?
To start with, the last year has seen the top three crypto-assets have grown almost exponentially.
Notes: Bitcoin grew 762%, Ethereum 1380% and Cardano 4071%, while the S&P 500 index grew 49%.
Let’s say you are an average Joe with $50,000 in savings and 2% ($1,000) is what you invested into Bitcoin and the remaining $49,000 into S&P 500.
Given how Bitcoin has played out in the last 12 months, your net wealth would have been $1,000 x (1+762%) + $49,000 (1+49%) = $81,630. That is, your net wealth would have increased by 63% reaching $81,630.
And let’s say armageddon happened and Bitcoin went to $0 (highly unlikely, but anyways) — your net wealth would then have become $1,000 x 0 + $49,000 (1+49%) = $ 73,010. The $1,000 you would have lost in this scenario is now only be 1.4% of your new net wealth.
So your bet was 1.4% risk for a +762% gain for investing in Bitcoin and even better “odds” of other currencies.
Even if you felt Bitcoin was a pure Ponzi scheme, you should have still invested because the risk to return ratio is the best you would have seen in your lifetime.
Governments quite cleverly are playing down all the money printing by having us focus on consumer inflation. But consumer inflation is not the right benchmark because a large part of your money outspend would be on things like housing which more directly linked to money supply i.e. money printing than consumer inflation (price of vegetables, gasoline and the likes).
Monetary Inflation caused by money printing has destroyed countries like Venezuela and that does not mean that the developed world will see the same outcome but it will see similar negative effects. If you eat a cheese burger everyday, don’t think you’ll get away it for too long — and that’s exactly what we have (sorry they have) done during this pandemic.
Bitcoin was and is an insurance policy and even if you don’t trust Bitcoin, find something else to trust because that printing has already happened and the value of your savings has depreciated as we speak.