Returns as of 02/13/2022
Returns as of 02/13/2022
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Gold has historically been the best hedge against inflation. But there is a new kid on the block. As a nascent asset, Bitcoin (CRYPTO:BTC) has been around for 13 years and has already demonstrated consistent staying power and positive price movement. Having started at an approximate price of $0.003 in 2010, it has risen more than 13 million percent to around $37,000 per bitcoin at the time of writing.
But the price of bitcoin is not what makes it a better inflation hedge than gold. It is Bitcoin’s adherence to a finite supply of 21 million coins. Similarly, a limited supply has long been surmised as a dominant reason for gold’s status as the world’s store of value, but I argue that Bitcoin has something more to offer.
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The supply of gold is not truly finite. At least not in practical terms. Imagine the day wherein we travel to other planets and mine for metals and minerals. We may discover a gold mine within an asteroid, and at that point, the relative scarcity of gold could completely be destroyed. Gold is only scarce because of our current spatial and technical limitations.
Also, if the price of gold were to shoot up overnight due to market forces, it would become profitable to mine more of the gold that is already beneath our feet. Gold miners would add more supply to the market and drive the price back down to levels where it is not as profitable to mine more gold.
Despite bitcoin’s name of “digital gold” their supply and inflation are nothing alike. Bitcoin has a finite supply of 21 million coins that can never be changed. Unlike gold, no amount of technical innovation or space exploration can increase (or decrease) the supply of bitcoin. Price fluctuations will not result in miners bringing more or less bitcoin into circulation.
Instead, the supply of new bitcoin coming into circulation is decided by an algorithm which is enforced by the miners running the network. This means that the supply of new bitcoin is detached from movements in price.
The supply of bitcoin is not regulated by any one individual, entity, or organization. It is regulated by an algorithm that began in 2009, and will end sometime around the year 2140 when the last bitcoin is mined. The algorithm is actually relatively simple to understand.
Here’s what you need to know: a single bitcoin block is mined approximately every 10 minutes, and the computer that mines the block earns a reward, which is some amount of bitcoin. In 2009, that reward was 50 bitcoin per block (which meant 50 new bitcoins were brought into circulation roughly every 10 minutes). For every 210,000 blocks mined (roughly every four years), that reward is cut by 50%. The block reward became 25 in 2012, 12.5 in 2016, and 6.25 in 2020. This effectively means that the inflation rate of bitcoin is slowing down and will eventually reach zero.
In 2022, the inflation rate of bitcoin is below 2% and decreasing with each passing block. This is below the target inflation for the USD, and below the average inflation rate of the supply of gold (13% in 2021). The inflation rate of bitcoin doesn’t depend on the price of bitcoin (like gold) or central bank or government policy (like the USD). The only thing that the inflation rate depends on with bitcoin is the blocks being produced.
Bitcoin’s inflation rate predictably and reliably decreases over time, giving investors like me a high degree of certainty that there will be fewer new bitcoins coming into circulation as the years go by. Today, more than 90% of all bitcoin (18.9 million) is already in circulation with the remaining 10% (2.1 million) set to be mined over the course of the next 120 years. After all of the bitcoin has been mined, the miners that maintain the security of the network will have to derive their paycheck entirely from fees paid on transactions.
At the end of the day, I’m trusting that the bitcoin supply schedule will remain on track and undisrupted. The only thing that could disrupt it is a globally catastrophic event such as a devastating solar storm or asteroid impact. Otherwise, the bitcoin network and its supply schedule is as resilient as the internet itself. The supply schedule of bitcoin is based purely on math, whereas gold and the USD are based on humans and the decisions they make. I have a much easier time trusting that the computers running the math will continue to do as they are told. It is bitcoin’s strict limited supply that makes it a superior inflation hedge than gold against the ever increasing supply of the USD.
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Stock Advisor launched in February of 2002. Returns as of 02/13/2022.
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