Fiat is Dying. Long Live Bitcoin.

Fiat is Dying. Long Live Bitcoin.

Fiat is dying. Those in charge of its management are destroying it. They have created unsustainable amounts of new money over the past years, which has resulted in accelerating levels of inflation. The most recent data in the US shows inflation at 40-year highs while the eurozone keeps beating record after record. Last year, inflation began to accelerate as a result of monetary policy. It was then made worse by the inaction of central banks to tackle it and the war in Ukraine, which sent energy prices soaring. Now, the world’s central banks are trapped. They can try to bring down inflation, by raising interest rates and reducing their balance sheets, but this will almost certainly cause a recession. Alternatively, they can take little or no action and let inflation run wild.

Central banks are reassuring us that they can achieve both economic growth and reduced inflation in the short to medium term, but this is almost impossible. It seems increasingly likely that they will achieve neither of those goals. Inflation, while created by their monetary excess, was made worse by factors outside their control - namely, the war in Ukraine. Monetary tightening will thus probably lead to a recession without having much effect on the root cause of the recent spike in inflation.
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Society, therefore, faces the rising risk of stagflation - a situation in which inflation is high and economic growth is stagnant or negative. This “perfect storm” would render central banks, as well as governments, powerless. A slowing economy would decrease tax revenues and high levels of inflation would force central banks to keep raising interest rates, which would make public debt unsustainably expensive. Governments would then have to resort to extreme and desperate measures to try and balance public budgets.

We are already seeing the early signs of desperate measures. Governments are implementing price caps, discussing rationing and preparing for other forms of market controls. Whereas these measures could provide short-term relief, they will create longer-term structural problems. The Italian government is discussing the rationing of energy. While in the UK, we have already seen how price caps have pushed utility companies into bankruptcy. Should bankruptcies continue and spread, it is likely that governments will have to take over companies or the entire markets in which they operate. In government ownership, these are likely to be mismanaged, which will create a number of other problems.

These market-manipulating measures are likely to start in the energy sector but spread elsewhere. The next sector that is likely to be affected by rising prices is the agricultural sector. Suddenly, like the energy sector above, the government could find itself in charge of food production, as attempts at price controls and rationing will have failed.

In addition to these measures, governments could actively confiscate assets. This could start in the form of tax rises to try to bring increasingly unstable public finances under control. It will begin with higher taxes on the rich, but then make its way down to the most economically vulnerable. When these measures fail, they will ask for voluntary contributions and the handing over of certain assets like gold, art, real estate and other property. Once that fails, they will start seizing assets like they did with Roosevelt’s gold confiscation in 1933 or Cyprus’s tax on bank deposits in 2013. In the meantime, people will try to leave these increasingly overreaching measures, which will create a displacement crisis and a further weakening of public finances. Banks will also increasingly act like the law enforcement agencies of governments and fiat will not be safe anywhere. It will not even be available to put under one’s mattress, as banks will limit withdrawals to prevent a bank run.

Anyone still using fiat, by this point, will see their purchasing power collapse as inflation keeps soaring. Central banks will keep printing, thinking it will help the economy, and make fiat increasingly worthless. A vicious cycle of inflation and declining economic growth is likely to take hold. Worthless money within a broader stagnating economy and an increased risk of confiscation will eventually reach a tipping point. Businesses and individuals will completely lose faith in fiat and businesses will stop accepting it. Paper money will be used to make wallpaper or art installations as we have seen in countries gripped by hyperinflation like Weimar Germany, Venezuela, Zimbabwe and 1946 Hungary.

In the past, this nightmare scenario would have led to a systemic collapse. Now, however, we have Bitcoin. Bitcoin protects us from physical confiscation, fiscal confiscation and monetary confiscation. It protects us from monetary confiscation, or inflation, because it has a fixed supply that no one will ever be able to alter or influence. There are no governments, organizations or individuals whose power, sway or opinion matter. Bitcoin’s supply is fixed at 21 million.

Bitcoin also eliminates the risks of entrusting your assets to banks or any other third parties when it is held in a non-custodial wallet. When one holds one’s private keys, there is no entity, which a government can exert pressure on in order to confiscate any given coins. There is no bank or other intermediary, which can be bullied. There is an unalterable stream of decentralized cryptography that is outside anyone’s control.

Bitcoin’s role as a monetary safety net is already clear in many collapsing economies and war zones. An increasing number of people realize that Bitcoin’s features make it superior to any other method of storing economic value - fiat is fickle, gold is impractical, art is fragile and so on and so forth. Bitcoin just requires mathematics and a communication system.

The fiat monetary system is designed to fail and the increasing risk of stagflation means that this failure is imminent. Whereas this failure would have meant systemic and economic collapse in the past, Bitcoin offers an alternative. When stored safely, Bitcoin protects your assets from macroeconomic mismanagement and political overreach. It also protects wealth by acting as a store of value and purchasing power because of its fixed supply. This will become obvious to an increasing number of people. The era of Bitcoin will then sweep away the failed fiat experiments of the past.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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