Purchasing Power Parity of Bitcoin compared to the Dollar - Part 2

adis992 (26)in #bitcoin • 8 years ago

Following from the last post about Bitcoin and fiat currencies in relation to strength and inflation, I would like to expand on the concept of using gold as a measurement tool for purchasing power. As stated at the start of the previous piece, the sentiment at the end of 2015 was that Bitcoin was bearish while the US Dollar was bullish.

However, this might not be the correct conclusion. If we examine our evidence in comparison to gold purchasing power, than the Dollar is currently more bearish than Bitcoin. The illusion only exists because we exchange Bitcoin to USD in order to measure its strength.

However this is just relative strength based on the fiat market. Although the USD might be gaining in strength relative to other fiat currencies, it is still a sinking ship. Just the slowest sinking of the fiats (By sinking we mean inevitable hyperinflation due to endless printing). If one wants to know the real relative strength of the USD the best tool is measuring how many ounces of gold you can purchase with one Dollar. When the Dollar was tied to gold in 1944 (Bretton Woods system) you could purchase 0.029 ounces with one Dollar ($35 per ounce), this however changed in 1971 when Nixon took the USD off the gold standard.

Here is a graph of how much Gold you can purchase today with a Dollar (In ounces).

As this graph reveals then the USD is stagnant and has reached a roof in terms of strenght, Notice however the big drop at the end, this is more or less at the exact same time as the Bitcoin as illustrated in below (Blue line is Bitcoin and White line is USD).

White line= USD and Blue line = Bitcoin. Scale is for Bitcoin

What this comparison also reveals is that Bitcoin is not acting on its own, it is reacting the same as other currencies traded on Forex. Bitcoin imitating Fiat Currencies in its movements is a healthy sign as it indicates that there are big players (traders) speculating on Bitcoin, this is better than Bitcoin acting like a penny stock and doing two hundred percent in one day like at the end of 2013, as it indicates maturity. This graph even indicates that you would have lost less in terms of gold purchasing power if you had keep Bitcoins as opposed to USD, now this is a stark contrast to what the Bitcoin media has been saying, as they are busy looking for a scapegoat to blame when there is none.

All in all we are still confident in Bitcoin and would rate it more Bullish than the USD. One has to remember that the USD has a government and ninety nine percent of its population backing it, and the Dollar can barely out compete Bitcoin in terms of overall strength.

We will leave you with a graph which shows Bitcoin over the past 2 years and how in relative strength it has surpassed USD growth multiple times (with USD having QE3 backing it)

White line= USD and Blue line = Bitcoin. Scale is for Bitcoin