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Shenandoah Bitcoin Club

Bitcoin and Inflation

Educate and collaborate

By Gary Krause

Email: gary@codechief.dev

Twitter: @garyKrause_

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What is inflation?

https://www.merriam-webster.com/dictionary/inflation

2: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

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How does it work?

Supply

Demand

Price

1 = $5

Price is a ratio. Supply vs Demand.

https://www.thoughtco.com/study-overview-of-inflation-1147538

The Link Between Inflation and Money

An old adage holds that inflation is too many dollars chasing too few goods. Because inflation is a rise in the general level of prices, it is intrinsically linked to money.

To understand how inflation works, imagine a world that only has two commodities: oranges picked from orange trees and paper money printed by the government. In a drought year when oranges are scarce, one would expect to see the price of oranges rise, because quite a few dollars would be chasing very few oranges. Conversely, if there was a record orange crop, one would expect to see the price of oranges fall because orange sellers would need to reduce their prices in order to clear their inventory.

These scenarios represent inflation and deflation, respectively. However, in the real world, inflation and deflation are changes in the average price of all goods and services, not just one.

Altering the Money Supply

Inflation and deflation can also result when the amount of money in the system changes. If the government decides to print a lot of money, then dollars will become plentiful relative to oranges, as in the earlier drought example.

Thus, inflation is caused by the number of dollars rising relative to the number of oranges (goods and services). Similarly, deflation is caused by the number of dollars falling relative to the number of oranges (goods and services).

Therefore, inflation is caused by a combination of four factors: the supply of money goes up, the supply of other goods goes down, demand for money goes down and demand for other goods goes up. These four factors are thus linked to the basics of supply and demand.

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How does it work?

Supply

Demand

Price

1 = $10

With less water, the price in dollar terms goes up.

In the ratio, the demand (price) goes up as the supply is limited.

https://www.thoughtco.com/study-overview-of-inflation-1147538

The Link Between Inflation and Money

An old adage holds that inflation is too many dollars chasing too few goods. Because inflation is a rise in the general level of prices, it is intrinsically linked to money.

To understand how inflation works, imagine a world that only has two commodities: oranges picked from orange trees and paper money printed by the government. In a drought year when oranges are scarce, one would expect to see the price of oranges rise, because quite a few dollars would be chasing very few oranges. Conversely, if there was a record orange crop, one would expect to see the price of oranges fall because orange sellers would need to reduce their prices in order to clear their inventory.

These scenarios represent inflation and deflation, respectively. However, in the real world, inflation and deflation are changes in the average price of all goods and services, not just one.

Altering the Money Supply

Inflation and deflation can also result when the amount of money in the system changes. If the government decides to print a lot of money, then dollars will become plentiful relative to oranges, as in the earlier drought example.

Thus, inflation is caused by the number of dollars rising relative to the number of oranges (goods and services). Similarly, deflation is caused by the number of dollars falling relative to the number of oranges (goods and services).

Therefore, inflation is caused by a combination of four factors: the supply of money goes up, the supply of other goods goes down, demand for money goes down and demand for other goods goes up. These four factors are thus linked to the basics of supply and demand.

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How does it work?

Supply

Demand

Price

1 = $1

With more water, the price in dollar terms goes down.

In the ratio, the demand (price) goes down as the supply is increased.

https://www.thoughtco.com/study-overview-of-inflation-1147538

The Link Between Inflation and Money

An old adage holds that inflation is too many dollars chasing too few goods. Because inflation is a rise in the general level of prices, it is intrinsically linked to money.

To understand how inflation works, imagine a world that only has two commodities: oranges picked from orange trees and paper money printed by the government. In a drought year when oranges are scarce, one would expect to see the price of oranges rise, because quite a few dollars would be chasing very few oranges. Conversely, if there was a record orange crop, one would expect to see the price of oranges fall because orange sellers would need to reduce their prices in order to clear their inventory.

These scenarios represent inflation and deflation, respectively. However, in the real world, inflation and deflation are changes in the average price of all goods and services, not just one.

Altering the Money Supply

Inflation and deflation can also result when the amount of money in the system changes. If the government decides to print a lot of money, then dollars will become plentiful relative to oranges, as in the earlier drought example.

Thus, inflation is caused by the number of dollars rising relative to the number of oranges (goods and services). Similarly, deflation is caused by the number of dollars falling relative to the number of oranges (goods and services).

Therefore, inflation is caused by a combination of four factors: the supply of money goes up, the supply of other goods goes down, demand for money goes down and demand for other goods goes up. These four factors are thus linked to the basics of supply and demand.

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How does it work?

Supply

Demand

Price

1 = $5

What happens if the amount of demand goes up?

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How does it work?

Supply

Demand

Price

0.25 = $5

With more dollars, the amount of water per dollar goes down.

Said differently, the purchasing power of the dollar is eroded.

In the ratio, the amount of supply you can purchase goes down.

This is inflation.

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How does it work?

Supply

Demand

Price

3 = $5

With less dollars (demand), the amount of water per dollar goes up.

Said differently, the purchasing power of the dollar is increased.

In the ratio, the amount of supply you can purchase goes up.

This is deflation.

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St. Louis Federal Reserve

Buying eggs with bitcoin

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Zoom out!

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Bitcoin vs USD Inflation Rate

Date	BTC	USD
March 2016	9%	0.9%
March 2020	4%	1.5%
March 2021	1.7%	2.6%
March 2022	1.7%	8.5%
June 2022	1.7%	9.1%
July 2022	1.7%	??
2024	<1%	??

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How does inflation happen?

Bitcoin

The inflation rate is pre-programmed.

US Dollars

https://www.investopedia.com/articles/investing/081415/understanding-how-federal-reserve-creates-money.asp

The Federal Reserve, as America's central bank, is responsible for controlling the supply of U.S. dollars.
The Fed creates money by purchasing securities on the open market and adding the corresponding funds to the bank reserves of commercial banks.
Banks then increase the money supply in circulation even more by making loans to consumers and businesses.
The Fed uses the federal funds rate to affect other interest rates and adjust the money supply.
To combat the recession caused by COVID-19, the Fed lowered the reserve requirement for banks to zero.

https://github.com/bitcoin/bitcoin/blob/6dc3084eec912cf2abfe18d1c05655defaa45e20/src/chainparams.cpp

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What is the Halvening/Halving?

A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half.

This event also cuts in half Bitcoin's inflation rate and the rate at which new bitcoins enter circulation.

Previous halvings have correlated with intense boom and bust cycles that have ended with higher prices than prior to the event.

Bitcoin last halved on May 11, 2020, around 3 p.m. EST, resulting in a block reward of 6.25 BTC.

https://www.investopedia.com/bitcoin-halving-4843769

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Bitcoin is deflationary.

What else is deflationary?

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The Price of Tomorrow

https://www.amazon.com/Price-Tomorrow-Deflation-Abundant-Future/dp/1999257405

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Bitcoin is deflationary.

What does that mean?

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Questions?

Thank you!

https://shenandoahbitcoin.club

@garyKrause_ on Twitter

gary@codechief.dev