Bitcoin's supply is controlled by mathematics, with a limit of 21 million units, while its price is determined by the free market.
A study by the US Federal Reserve compared the inflation of the dollar against Bitcoin. Although Bitcoin has experienced two inflation spikes, at 325% per year in December 2018, and 269% in November 2022, the data shows that the cryptocurrency tends to see an increase in its purchasing power most of the time.
As an example, while dollar inflation has been hovering between 2.4% and 3.5% over the last twelve months, Bitcoin has seen deflation (negative inflation) between 31.8% and 61.6% over the same period.
Bitcoin inflation (in red) and dollar inflation (in blue). Source: FRED.
According to the author of the Fed paper, this Bitcoin deflation is bad.
“This is problematic for a currency used in transactions: with deflation, consumers expect prices of goods to fall and thus postpone their purchases, which can lead to an economic collapse,” wrote Christian Zimmermann, assistant vice president at the Federal Reserve Bank of St. Louis.
Continuing, Zimmermann points out that the dollar itself has already had episodes of deflation, where its purchasing power increased, but that was a long time ago.
“Noticeable dollar deflations have not happened in a long time. Why? All significant deflations occurred during a period when the supply of U.S. dollars was tied to the quantity of gold: in other words, when the U.S. economy was on the gold standard.”
Although the gold standard was only abandoned in 1971, the dollar's greatest deflation peaks occurred about 100 years ago, between World War I and World War II. Since then, the dollar has only been losing purchasing power, even registering periods of recession along the way.
Purchasing power of the dollar (in blue) and price of Bitcoin (in red). Recession periods are marked in gray. Source: FRED.
In other words, the US Federal Reserve itself claims that its goal is to devalue its money so that people stop saving and continue spending. Bitcoin, on the other hand, has the opposite effect.
Study designed to mock Bitcoin shows the power of cryptocurrency
In the same year, in 2022, the US Federal Reserve published another study on Bitcoin versus the dollar. At the time, a dozen eggs were costing $2.7 or 11,116 satoshis (0.00011116 BTC).
Today, just over two years later, those same eggs are costing $3.37 in local currency or 5,116 satoshis (0.00005116 BTC). In other words, the price of eggs increased by 24% in dollars, but became 54% cheaper when quoted in Bitcoin.
Price of a dozen eggs in satoshi (0.00000001 Bitcoin). Source: FRED.
Zooming out, this difference is even more noticeable. In 2015, the earliest date for which the data is available, a dozen eggs cost 925,406 satoshis (0.00925406 BTC).
Price of a dozen eggs in Bitcoin. Source: FRED.
Finally, this data explains why more and more companies are adopting Bitcoin as the main asset in their cash flow. This Tuesday (12), for example, it was the turn of Genius Group, a company focused on education, to adopt Bitcoin.
The announcement states that the company will keep 90% of its reserves in Bitcoin, in addition to accepting the cryptocurrency as a payment method for its services.
Genius Group's Nasdaq-listed shares are up 49% since announcing the strategy. Thomas Power, the company's director, cited MicroStrategy as an inspiration.
The expectation is that more and more companies, and even countries, will migrate their reserves to a strong currency.