Previously on the blog, I wrote about why Bitcoin exists. Today I’m going to go into what bitcoin does and why it will be so important.
Because of inflation, fiat currency like the US dollar loses its value over time. This means that savers are penalized and spending is incentivized. How much exactly? Well, the dollar depreciates in value about 2% per year. Say you just want to save money by putting it into a savings account where you can get 1.3% apy interest. That means that if you put $100 away in the savings account, one year later you’ll have $101.3 dollars. But! Due to inflation, the goods and services that those dollars are actually worth has decreased by 2%. So you’ve increased your face value to $101.3 but the purchasing power of your money has actually decreased to $99.27. If you let that $100 sit in a bank for 10 years, at the end of those 10 years you’ll have $113.79 dollars but they’re actually only worth $92.97! You’ve saved money, you’ve been disciplined and haven’t spent it, and yet it’s worth LESS than what you started with!
This is a major problem! Bitcoin solves this problem by being a DEFLATIONARY currency. Instead of losing purchasing power every year, you gain purchasing power. This is because there will only ever be 21 million bitcoins. You can divide up a bitcoin far more than you can a dollar. Whereas the dollar can only be divided up into 100 pennies, a bitcoin’s smallest unit is 100 millionth of a bitcoin. The Federal Reserve can decide to print more dollars whenever they wish but they can’t make more bitcoins. So bitcoins are far scarcer than dollars which makes them attractive as a long term strategy to maintain value.
What does this all mean? It means that decades of perverse incentives to spend can be reversed. Savers will be rewarded for their patience. Spenders will second guess purchases, prudent spenders will spend less. US household cash savings are at an all-time low; in the event of a financial emergency such as an illness or losing a job, many millions of Americans are incapable of getting back on their feet. Being able to store money that you know will be there for you in the future is the basis of having a life that improves upon the generation that came before. Bitcoin will reintroduce savings as a virtue!
Interested in bitcoin? Leave your thoughts below in the comments section!