Updated: Nov 25, 2021
Humankind faces a predicament when it comes to money: cash, the simplest form of money, is losing value faster than ever before. This will affect businesses and individuals alike, especially if we are unaware of the fact that it is happening.
Money is a technology. It has evolved over millennia to facilitate exchanges of value between people, and to store that value over long periods of time to be used as and when the holder of that money sees fit. We’ve seen various iterations and manifestations of money over the years: shells, precious stones, glass beads, gold, and, most recently, government-issued “fiat” currency.
Fiat currency is not backed by a physical commodity but relies on a shared faith in the power it holds. Being disconnected from a commodity means that the purchasing power of fiat currency can vary. Inflation results in the purchasing power of fiat currency dropping, and this means that you get less bang for your buck. Too much money in circulation chasing the same amount of goods leads to inflation.
Many people are surprised when they learn that the world’s currencies are no longer backed by gold reserves. This is why, since the outbreak of Covid-19, central banks the world over have been able to stimulate the economy by creating new cash and injecting it into the economy. The Federal Reserve in the United States has created around $9 trillion since March 2020. To give you an appreciation for the scale of that injection, approximately 40% of all dollars that have ever existed were created last year.
This is shocking as it has a direct impact on every person and business holding cash. This is because the purchasing power of cash, in real terms, is being diminished at an alarming rate. Cash has steadily lost purchasing power to inflation over the last 50 years, and the rate of loss is now increasing more and more rapidly. Michael Saylor, founder and CEO of MicroStrategy, has dubbed this a “melting ice cube.”
"A debasement of coinage is the practice of lowering the intrinsic value of coins, especially when used in connection with commodity money, such as gold or silver coins. A coin is said to be debased if the quantity of gold, silver, copper or nickel in the coin is reduced."
Fiat currency such as US dollars, Euros, Yen, Indian Rupees, etc. which we all use, are similarly debased through the addition of new monetary units "money printing." Since the establishment of the US central bank, the Federal Reserve, the US dollar has lost 98% of its original value.
The decline in purchasing power of the US dollar between 1913 and 2019.
The decline in the value of the dollar has been most spectacular since 1971, when the gold-backing of the dollar was removed. This was when the era of floating currencies began. When governments are given free reign to spend (without a peg to Gold or a sound money as base), which is the case of the US government since 1971, this incentivizes governments to print money (quantitative easing).
"Quantitative easing—QE for short—is a monetary policy strategy used by central banks like the Federal Reserve. With QE, a central bank purchases securities in an attempt to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses."
However, in practice, QE works differently. As seen below, the main beneficiaries of QE are the banking entities and those closest to these entities. The trickle-down effect of QE is in practice, negligible. Quantitative easing enriches the financial sector to the detriment of the common man.
The game has flipped on its head with the advent of cryptocurrencies. Money and stores of value no longer need to be centralized or in the hands of government authorities who have historically misused their power. This is why Bitcoin and the crypto revolution is historic in nature. With the limitation of Bitcoin supply to 21,000,000, no government, no central authority can manipulate its value. This scarcity limitation is what gives it an ever-growing value. Aside from precious metals, which carry risk of asset seizure, humanity now has a digital store of value that can be held in secure self-custody, where the saver's individual net worth is not eroded at the will of a central bank or government authority. This is indeed a giant positive leap for mankind.