Money Matters: Debasement vs. Inflation - Understanding the Difference

A Look at the Markets: Bitcoin

Bitcoin seems to be forming another consolidation zone between $92,000 and $108,000. However, it’s important to remember that the price could potentially break in either direction.

Even during a bull market, a 33% correction down to the previous resistance level at $72,000 would not be an unusual occurrence.

On the other hand, positive cryptocurrency fundamentals from the new Trump administration could potentially lead to a breakout above $108,000. It’s worth noting that there were no mentions of a strategic Bitcoin reserve in the initial days of the administration.

Money Matters: Debasement vs. Inflation - Understanding the Difference

A common misconception is that debasement of currency is the same as inflation. However, this is not the case. Here is former hedge fund manager, Raoul Pal, thoughts on the subject:

Understanding the Key Differences

Currency debasement and inflation are related but distinct economic phenomena. Here's how they differ:

Currency debasement is a specific action such as - typically when a government or central bank increases the money supply without a corresponding increase in economic output. This is known as monetary policy. Think of it like adding water to juice - you're diluting the value, and hence purchasing power, of each unit of currency. We discussed this in more detail in last week’s newsletter.

Inflation, on the other hand, is the broader rise in prices of goods and services across an economy. While debasement can lead to inflation, inflation can occur for many other reasons, such as:

• Supply chain disruptions (as in the Coronavirus pandemic)

• Changes in consumer demand (also as in the Coronavirus pandemic)

• Resource scarcity

• Wage increases

• Economic growth

A Practical Example

Imagine you're running a small café. If the central bank debuts significant amounts of new money (debasement), you might eventually need to raise your coffee prices because each euro is worth less. That's inflation driven by debasement.

However, if you raise your coffee prices because coffee beans became more expensive due to a poor harvest in Brazil, that's inflation without debasement.

Why This Matters for Your Investments

Understanding this difference helps you make better investment decisions. Different types of assets respond differently to debasement versus other forms of inflation.

During currency debasement, assets like gold, commodities, and certain cryptocurrencies often perform well because they can't be "debased" - their supply can't be artificially increased.

During inflation caused by economic growth, assets like stocks might perform better because companies can often raise prices to maintain profitability.

Understanding Official Inflation Figures

An important insight for investors is that government inflation figures primarily focus on consumer goods and services. These are everyday items such as food, health expenses, transport or monthly rent. However, these official figures don't capture the full impact of currency debasement because they exclude asset prices such as equities, gold, property or cryptocurrencies.

This creates an interesting situation: while official inflation might appear moderate, the effects of currency debasement often show up first in asset prices, which can rise dramatically. For instance, while consumer price inflation (CPI) might show 2-3% annual increases, assets like stocks, property, or gold might rise by 10-20% or more during the same period.

This "hidden" impact of debasement is one reason why keeping too much cash in savings accounts can be riskier than many people realise. I will conclude with a statement from Larry Fink, chief executive of Blackrock Inc, speaking from the World Economic Forum in Davos this week.

Business English Vocabulary Focus

• Money Supply: The total amount of money in circulation

• Monetary Policy: The actions of a central bank to control money supply

• Purchasing Power: The amount of goods and services you can buy with a unit of currency

• Consumer Price Inflation (CPI): A rise in the general level of prices

I want to examine this topic further next week by examining the “Cantillon Effect”.

Bitcoin Price to Reach ‘Multiple Millions’ According to Brian Armstrong

This week, Brian Armstrong, a key figure in the crypto world, shared his thoughts about Bitcoin's future price potential.

Who is Brian Armstrong?

Brian Armstrong is a pioneering figure in the cryptocurrency industry and has made it more accessible to everyday investors. He is the co-founder and CEO of Coinbase, the largest cryptocurrency exchange in the United States by trading volume. Coinbase is listed on the NASDAQ stock exchange.

Should We Consider His Market View?

When we evaluate market predictions, it's helpful to think about both the insights and potential biases behind them. Let's break this down:

Armstrong's perspective comes from running one of the largest cryptocurrency exchanges in the world. This gives him valuable insights into market trends, much like how the CEO of a major bank would understand traditional banking trends. However, just as a restaurant owner might be optimistic about the future of dining out, Armstrong has natural reasons to be positive about cryptocurrency's future.

Remember that Coinbase generates revenue when people trade cryptocurrencies. Higher Bitcoin prices typically lead to more trading activity, which benefits cryptocurrency exchanges. It's similar to how increased house prices usually benefit real estate agencies through higher commissions.

Understanding Price Predictions

When we look at Armstrong's prediction, two important aspects stand out.

First, saying ‘multiple millions’ is not very precise. Technically, two million dollars is ‘multiple millions’.

Second, the prediction doesn't include a timeframe.

In other words, if the Bitcoin price reaches 2 million dollars in a century, it will have satisfied Armstrong’s prediction.

This is quite different from Michael Saylor's more specific forecast of €13 million in 21 years. While both predictions are optimistic, Saylor's provides clearer parameters for evaluation.

I'll craft a concluding paragraph that summarizes the key takeaway for investors while maintaining a balanced, informative tone:

Navigating Market Predictions with Wisdom

While it is interesting to listen to financial predictions, it's crucial to develop a more sophisticated approach to investment decision-making. Every prediction comes with its own set of biases and limitations. Professional investors understand the importance of:

1. Checking the potential biases of the source

2. Gathering multiple perspectives

3. Considering the fundamental drivers of value

In Bitcoin's case, the fundamental driver remains adoption. This means looking beyond price predictions and examining:

• Institutional acceptance

• Technological developments

• Real-world use cases

• Regulatory landscapes

Instead of chasing a single prediction, build a balanced investment strategy that considers multiple expert views, fundamental analysis, and your personal financial goals. Remember, the most successful investors don't just listen to predictions - they critically evaluate them.

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Word of the Day: Dilute

Dilute - verb - to make something weaker

Financial Context: to make something less strong or less valuable.

When applied to currency, dilution refers to reducing the value or purchasing power by increasing the money supply.