It has been 14 years since Bitcoin (BTC -0.39%) first launched, and since then, it has been a roller coaster ride. There have been multiple crypto winters and, of course, some historically explosive bull runs. As these cycles have unfolded, it seems Bitcoin's popularity and recognition as a legitimate investment only grows.
There are likely a handful of reasons Bitcoin has risen to this level of notoriety today, but what trends could give it the next leg up?
Well, there are likely three in particular -- and they all have to do with the U.S. government.
Persistent inflation
One of the main premises of investing in Bitcoin is that it serves as a hedge against inflation. This is particularly relevant today with inflation at multidecade highs, but if we zoom out even further, having a means to preserve wealth becomes imperative.
The U.S. has a long history of debasing its currency; since 1971, the U.S. dollar has lost 98% of its purchasing power. While some inflation rates are generally considered healthy for the economy, its continued and unpredictable onset (of which lower and middle classes typically bear the brunt) could drive investors to find an alternative to the status quo.
While many believe gold to be superior at maintaining value, even this precious metal has proven to produce lackluster returns when accounting for inflation. The truth is, for those looking to circumnavigate government-induced monetary debasement, Bitcoin is a viable option.
Unlike the dollar and even gold, which are both subject to the whims of central banks and governments, Bitcoin operates on a decentralized network that is resistant to unforeseen increases of inflation and debasement.
This is because Bitcoin has a pre-programmed finite supply. There will only ever be 21 million coins in circulation. This scarcity drives up demand and makes it an attractive asset to hold in a world where fiat currencies continue to lose their value.
Confidence in the government continues to slip
Not only can Bitcoin benefit from the devaluation of the dollar, but it will likely become a benefactor of a larger growing trend -- a lack of confidence in the U.S. government.
According to the Pew Research Center, trust in the government is near an all-time low. As a result, people are looking for alternatives to traditional systems of finance and governance. As a decentralized and independent asset, Bitcoin takes center stage since it isn't subject to government overreach or inflationary policies.
Should trust in the government continue to erode as it has been since Lyndon Johnson was president in 1964, the realization that Bitcoin operates outside of the control of traditional governments will likely only make it more alluring. If this occurs, demand for Bitcoin will have to compete with the limited supply of 21 million coins -- and that could mean great things for Bitcoin's price.
The debt crisis
While inflation and distrust in the government might have helped Bitcoin over the past 14 years, there's one other aspect that could further exacerbate these problems -- money supply expansion.
This is the cherry on top, but it can get a little confusing. By understanding this concept, we can see the true importance of Bitcoin in our current world.
Money supply expansion helps keep U.S. debt minimal in nominal terms. This is done in two ways. First, it allows the government to finance more income-producing projects related to national defense, infrastructure, and healthcare. Also, it makes the debt seem smaller relative to the amount of money available. In doing so, this reduces the value of each dollar and thus makes it easier to pay back debt.
The downside to this approach is that it leads to inflation. This is why many people were concerned about the expansion of the money supply by the Federal Reserve in response to the economic fallout from the COVID-19 pandemic -- a similar strategy to the one taken during the Great Recession.
Even though it seems today that the worst of COVID-19 might be behind us, our country's debt continues to increase exponentially, with little sign of slowing. If the strategies employed in the past are used again, they could extend the effects of inflation and lead to further distrust of the government.
Bitcoin fulfilling its purpose
All of this may sound like a long shot, but Bitcoin was actually created back in 2009 as a way to combat these exact circumstances. Perhaps it's merely a coincidence that Bitcoin's rise since the Great Recession occurred during a huge increase in the nation's debt and money supply. Perhaps it's happenstance that Bitcoin continues to garner attention just as faith in the government declines.
Or maybe it isn't. Maybe this is exactly what the pseudonymous Satoshi Nakamoto intended when he (or they) designed Bitcoin 14 years ago and why it continues to prove naysayers wrong.
