Why is Bitcoin a Deflationary Tool for Hedge Fund Managers?

Basically because the U.S. Federal Reserve keeps printing money.

But it is perhaps not that simple…

There’s a limit to the number of Bitcoin that will exist: 21 million. Once Bitcoin hits that amount, miners will no longer receive block rewards, and no new Bitcoins will enter the market. That might not seem like big news to you, but economists are up in arms over what will happen in a currency system that has a fixed supply.

On the other hand, the Fed can issue new money at any time and there is no limit to the amount of money it can create. As more money is printed and enters the economy, the value of the dollar decreases over time.

That is, a pack of gum may have cost $0.05 in the 1950’s and costs $1.50 today. That isn’t because it has become more expensive to manufacture gum, but rather the value of a dollar is less valuable now than it was 70 years ago.

The value, or purchasing power, of fiat currency is continually decreasing over time because of the Fed’s penchant to print more money. The growth of money supply and corresponding decrease in purchasing power is called Inflation.

All fiat currencies are inflationary because of the continuing increase in money supply — i.e., the total number of dollars in circulation.

Because of this, people have an incentive to spend, not save. Why put $100 under your mattress when you know that in 5 years the purchasing power of that $100 will be a fraction of what it was today?

Bitcoin, with its fixed supply, is different. Bitcoin is deflationary because its purchasing power increases over time.

For hedge fund managers, Bitcoin can be used as an alternative to the dollar. As is common, hedge fund managers will keep a certain percentage of assets under management in cash — which, as explained above, decreases in value over time. Bitcoin provides the deflationary alternative to holding fiat currencies.

Now, of course, the price of Bitcoin can be volatile and it may not serve to be an ideal store of value, but, alas, that is another story for another time.
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A former professional rugby player, Adam S. Tracy brings over twenty years’ experience as an attorney, consultant and dealmaker with a particular focus on cryptocurrency, digital products, payments and immersive corporate structures. As an accomplished executive and advisor to high risk merchants and stakeholders, Adam has proven himself as a results oriented, decisive leader with proven success advising early market entrants, technology adapters, as well as established participants across a wide range of verticals. Adam Tracy’s attack-first personality allows him to excel in dynamic, demanding environments including complex corporate negotiations, distressed environments and regulatory investigations.

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Adam S. Tracy earned his Bachelor of Science in Computer Applications and Bachelor of Science in Finance from the University of Notre Dame. He subsequently earned his Masters in Business Administration from the DePaul Kellstadt Graduate School of Business, while concurrently earning his Juris Doctorate from the DePaul College of Law. Adam lives outside Chicago with his with his wife, son, four dogs, and two cats.

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