While the price of Bitcoin continues on an upward path reflected in the last months of the year 2021 (reaching various historical limits), there are two positions regarding this price increase, some say that Bitcoin is a simple “speculative bubble,” while others claim that such value is supported by blockchain technology, its good reputation, and transparency; on the other hand, we have the US dollar (FIAT), where some people mention that its value is maintained, while others affirm that the dollar loses every time more value. In this article, we will analyze some indicators that will help us understand these two opposite trends.
Number of units of Bitcoin and the US dollar
The fundamental difference between Bitcoin and the US dollar is the number of units they own; on the one hand, the number of Bitcoins is limited (and no more can be created); on the other hand, the US dollar can have an unlimited amount of units, which can be created through various mechanisms that the government and central banks have (open market operations and money from commercial banks and central banks). Each time more units of a currency are created, it loses value in the market since such growth is not based on a real value but will be due to the simple creation or printing of more FIAT money.
Historical devaluation of the dollar after abandoning the gold standard
As we saw in our previous article entitled Why did the US dollar go off the gold standard? The US dollar was not always as it is today; before the reform of President Richard Nixon (1971), each US dollar was backed by a part (or fraction) of gold, at that time, every time they wanted to create new dollars, they had to be properly supported (or at least a part of them), however, today the government and the central bank can create new dollars with no restrictions. After the reform of President Nixon in 1971, each dollar became a “commitment or promise” of “future payment” by the US government and no longer represented a specific amount of gold.
The current value of the dollar against the currencies of other countries
It is important to note that in recent months the US dollar has experienced a decrease in its value against the currencies of other countries; this is another factor that makes some people mistrust the US dollar to preserve their heritage. Usually, the decrease in the value of a local currency (compared to the currency of another country) is due to the economic policies of each government; positive and transparent economic policies improve the value of the currency, while negative economic policies, or not very transparent, will cause the value of the currency to decrease.
Monetary policies of the United States against Covid-19
This is perhaps one of the factors that have most influenced the reputation of the dollar. However, the US government during the year 2021 has provided different economic aid to various people, companies, and businesses, through “capital injections,” bonds, and stimuli. The problem with these policies is that although they have a good intention, they end up generating more inflation, since these resources are created by “printing” more bills or creating more dollars using the different mechanisms of the central government and the central bank, having more dollars in the market, they lose value and confidence, therefore, people, businesses and investors turn to other alternatives to preserve their assets.
Conclusions and reflections
Although Bitcoin is currently very popular and in-demand due to blockchain technology, its decentralized system, and transparency, a large part of its increase in value is due to the devaluation of the US dollar itself, a process that has been “accelerated” due to to the different economic measures taken by the North American government as a result of the COVID-19 pandemic.
What do you think about this topic? Do you agree that the dollar has been devalued?
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