Bitcoin has gone through a long journey from a currency worth only a few coins to becoming a highly valuable asset and has a certain influence on the cryptocurrency market in particular and the financial market in general. shared. The traditional financial market itself has many shortcomings as I just analyzed above, creating conditions for the birth of new financial solutions such as Bitcoin.
Problem 1: Inflation
One of the important challenges that Bitcoin faces and successfully solves is the problem of inflation in the financial and economic system. Bitcoin's decentralized nature and limited supply, with a maximum total supply of 21 million coins, provides a basis for countering the inflationary pressures that traditional currencies often face. This scarcity has led many to view Bitcoin as "digital gold".
But before we delve into this area, let's understand what inflation is and why it has such a profound effect on our lives.
Have you ever gone to the store and felt like the prices had increased compared to before? Or remember the stories your grandparents told about buying a bag of rice for half the price it costs today? That is inflation, a phenomenon that almost all of us have experienced.
Inflation is like enjoying a delicious cup of iced milk coffee every morning. But every day, the barista reduces the coffee a little and adds an ice cube. At first, you may not feel the change, but over time, you will start to notice that your coffee becomes weaker. For the same price, you can just drink less coffee than before. The purchasing power of your money decreases.
Inflation, simply, is an increase in the prices of goods and services over a certain period of time. When inflation occurs, each dollar you have will buy fewer goods than before.
What causes inflation is a complex question, but there are usually three main factors mentioned:
Supply inflation:
Origin: Originates from an increase in production costs, including raw material prices, worker wages, energy prices, or gasoline prices. When production costs increase, businesses often increase product prices to cope with these costs.
Consequence: Increasing product prices leads to a decrease in shopping and consumption. If this situation persists, it could cause an economic recession.
Demand inflation:
Origin: Originated from an increase in consumption demand over supply. This could come from increased government spending, lower interest rates, or increased people's income.
Consequence: Prices increase because demand exceeds supply. If not controlled, it can lead to "overheating" of the economy and cause asset bubbles.
Currency inflation:
Origin: Originates from an increase in the amount of cash in circulation without a corresponding increase in the output of goods and services. Usually happens when the government prints more money.
Consequence: The real value of money decreases, leading to an uncontrolled increase in prices of goods and services.
In the journey to learn about inflation, the Fed has shared with us the two most important causes: "supply inflation" and "demand inflation". But amid the complicated developments, there is a big reason that the government often keeps secret - that is "printing more government money".
Covid-19 has caused all activities to stagnate, and raw material prices suddenly increased. This has pushed up commodity prices, creating the phenomenon of "supply inflation". On the contrary, people, in their infatuation with uncontrolled shopping and spending, have contributed to pushing up commodity prices, called "demand inflation".
However, there is a reason behind the curtain, which is that the FED is "printing more money". The Fed creates new money, essentially digital money, and then uses it to buy bonds. From February to June 2020, the Fed's balance increased significantly from $4.16 trillion to $7.17 trillion. In three and a half months, the Fed "printed" about $3 trillion more into the economy.
This image of printing money is like the story of the cup of coffee above, when each time printing more money is like adding ice to a cup of coffee. Gradually, the cup of coffee becomes weaker and no longer retains the same quality as before.
Although printing money can stimulate economic activity, especially in times of crisis, if not tightly controlled, it can lead to inflation. This phenomenon reduces the real value of the currency, affects the value of savings and can undermine confidence in the currency.
A more dangerous situation of inflation is "hyperinflation". Hyperinflation is a situation in which inflation levels skyrocket uncontrollably, especially every month or even every week, bringing with it particularly severe consequences for people's daily lives.
One of the most common causes of hyperinflation is the act of "printing money" without equitable economic growth. When the government prints more money without synchronizing it with the increase in production of goods and services, the result is an uncontrolled increase in prices, causing the real value of money to decline. suddenly.
Some historical examples of hyperinflation are Zimbabwe, which, in the period from 2000-2009, experienced a terrible hyperinflation vortex. The peak of this situation came in November 2008, when the inflation rate reached a record 79.6 billion percent per month, causing prices to almost double every 24.7 hours.
Another story of modern currency devaluation and hyperinflation is Venezuela, from 2016 to present. The country's economy collapsed, and hyperinflation became one of the most terrible problems. In 2018, the inflation rate was estimated to surpass 1,000,000%, forcing people to carry pockets full of money just to buy a loaf of bread.
Faced with the challenge of inflation, governments and central banks often apply a series of measures to control the situation. The first typical example is the increase in interest rates. When interest rates increase, borrowing money becomes more expensive, stimulating people and businesses to reduce spending and investment. This helps control inflation by reducing demand in the economy.
The second action is for the government to take measures to cut spending to reduce consumption demand. This could include reducing budgets for non-essential projects and programs, to ensure that the money supply does not grow too quickly.
Third is the central bank's control of currency by reducing the amount of cash in circulation. Thereby, they can slow down the growth rate of money and control inflation levels.
Although inflation is not always bad, as in the case of "good" inflation when it is combined with economic growth and low unemployment, hyperinflation can bring negative consequences. severe consequences. It not only worsens poverty but also increases instability and destroys trust in institutions.
Historical examples like post-World War I Germany are just a testament to this situation. Today, we see the painful consequences of hyperinflation in Venezuela, Zimbabwe, Lebanon, and Argentina, just to name a few of the countries facing this problem.
In that context, Bitcoin offers a positive solution. Bitcoin is not only deflationary but also highly decentralized. The ability to securely store and transfer Bitcoins creates a flexible financial vehicle that is immune to inflation. This has made Bitcoin a popular and strong choice as a potential hedge against economic problems related to inflation.
Issue 2: Ability to transfer money
The ability to transfer money is the second factor we will discuss when talking about the problem Bitcoin is solving. Bitcoin solves the international problem of delaying remittances in a flexible and efficient way. In traditional money transfer systems, especially international money transfers, senders often face high fees and long waiting times during the transaction process.
With Bitcoin, not only do senders retain full control over their funds, they also have the ability to make transactions at any time without being limited by national borders or bank holidays. This flexibility not only reduces the burden of time but also eliminates the hassles associated with traditional bureaucracy, creating a convenient and convenient money transfer experience.
Issue 3: Transparency
Transparency is one of the important aspects that Bitcoin sets out to solve problems in the payment system. Blockchain technology, the engine behind Bitcoin, provides superior transparency by ensuring that every transaction is publicly recorded and verified on the blockchain.
With this transparency, no individual or organization can control or manipulate the blockchain. This creates a payment environment that does not require trust from third parties. Bitcoin users have the ability to independently audit and confirm every transaction, minimizing the risk of fraud and creating a payment system that is autonomous and does not require centralization. This also increases transparency and fairness in the payment process, making Bitcoin a trustworthy payment method that does not require the intervention of central parties.
Issue 4: Security
Finally, there is the issue of security. Bitcoin transactions are secured by a network of computers around the world. Every Bitcoin transaction is tightly secured, no changes are allowed after it has been confirmed. This means each transaction is irreversible and maintains the integrity of the transaction data. Transactions are immutable, secure, and publicly verifiable on the Bitcoin blockchain.
