In recent times, the word “inflation” has become firmly established in everyday speech. It is puzzling that a term formerly reserved for the jargon of economists and investors now appears in conversations held by people even on the street and in everyday situations. What does the phenomenon of inflation mean for the average citizen? The answer is probably already known to everyone: first of all, depletion of the wallet through a decrease in the purchasing power of money. In other words, we are able to buy fewer and fewer products for the same amount of money over time. Can cryptocurrencies save us from this? We will devote today’s article to this issue.

Inflation, or why is it so expensive?

Inflation, or an oversupply of money in circulation, directly translates into a systematic increase in the price of virtually all goods available on the market. The more money that enters the market, the more can potentially be spent, so producers of goods and services automatically raise prices. Faced with an increase in the amount of cash available for circulation, this is the simplest and safest strategy to produce a satisfactory financial result. Even if the number of consumers purchasing a product is reduced due to higher prices, the capital surplus from increased prices should ensure that profit is maintained at an acceptable level. Amid rampant inflation, entrepreneurs are making the right assumption: “there is so much money circulating in space that sooner or later it will come to us anyway, so prices go up.”

Why is there a situation where we are experiencing an excess of money in circulation? Entrepreneurs are by no means to be blamed for the inflationary “dearness” afflicting us at every turn. Their strategy is only a secondary phenomenon, the cause of the problem lies much deeper, at the very foundation of the functioning of modern fiat currencies.

“Fortune” rolls on absurdly

One of the main drivers of inflation is the money creation mechanism of the fractional reserve system. Underneath this enigmatic-sounding term is a key principle of commercial bank operations, which applies in all countries with a free market economy system. Fractional reserve banking is a banking system in which banks are legally obliged to hold only a small portion of their deposits as actual reserves. Currently, the amount of reserves mandatorily secured in the deposits of national central banks has been set at a few percent. This means that banks are free to invest the remaining 90% of their accumulated capital in investments, such as trading in securities and extending a wide range of loans.

The purpose of the fractional reserve system is one: to allow banks to maximize profits. De facto banks do not keep our money in a safe at all, but inject it into the economy with a light hand and a wide stream. As a result, there is money on the market that would normally function outside of circulation, for example, as passive funds. Let’s use a simple illustration: Mr. Brown deposits EUR 1,000 in a savings account, his bank “freezes” the mandatory reserve of EUR 40 as a deposit with the national central bank, then indirectly allocates EUR 960 from Brown’s account for a consumer loan to Mr. Pink. Mr. Brown did not intend to spend the funds he had in any way, he just wanted to store them safely for the future – meanwhile, their lion’s share after a while ends up in the hands of Mr. Pink, who the day after visiting the bank with the borrowed funds makes a purchase of new household appliances…. Let’s cut to the chase: the transfer of EUR 960 in credit to Pink, as it were, from Brown’s account by no means changed Brown’s account balance! Not a single zloty has disappeared from his account, the statement still shows the original amount of EUR 1,000, which Brown can withdraw at any time…. This is the process of creating currency out of thin air by commercial banks.

The lending process in fractional reserve banking is a cycle that amounts to a vicious cycle. When borrowers repay their loans, banks re-lend the funds entrusted to them to other borrowers, thereby increasing the money supply. Since banks always receive more money in connection with interest rates than they originally entrust to borrowers, the pool of money issued into the economy is constantly growing. This cycle can continue virtually indefinitely, leading to a steady increase in inflation. Harmful to the average consumer, the policies of commercial banks go hand in hand with the mechanism of “empty printing” of currency, which is now practiced by all central banks of countries within the sphere of influence of the International Monetary Fund. It involves the unlimited issuance of money, which does not have to be backed by any means of value, such as gold or raw materials. As a result, today’s currencies, not excluding the Euro or Polish zloty, are covered only by debt, and we all live on one big loan taken most often against our will.

Cryptocurrencies versus traditional banking

Not surprisingly, with the pathology of the banking system weakening traditional currencies and eating away at our savings, more and more people are turning to investing capital in the form of virtual currencies. Cryptocurrencies and fractional reserve banking are two financial systems that operate on completely different principles. They differ dramatically not only in their approach to means of payment, but also on the matter of ideology.

Let’s briefly define the two systems in opposition to each other. Digital currencies are created and managed using complex algorithms and cryptography. Here comes the first major difference from fiat money printed out of thin air: in order to create a unit of Bitcoin and issue it into circulation, a considerable amount of money, time and hardware resources must be invested to solve complex cryptographic puzzles in the mining process. So bitcoin finds coverage not in abstract debt, but in real work done.

In addition, cryptocurrencies are decentralized, meaning they are not under the direct control of central authorities such as national governments or international unions and corporations. Meanwhile, the depreciation of traditional currencies resulting in inflation and impoverishment of society is happening precisely because of monetary regulations dictated by central power centers, i.e., the interconnected world of politicians, bankers and businessmen. In addition, the centralization of banking means that a few large banks control most of the world’s money supply. This concentration of power leads to fraud and corruption, as can be seen in the numerous financial scandals that are publicized again and again in the media space.

Going forward, crypto transactions are recorded in a public ledger called a blockchain, co-created by a network of node computers that verify each transaction, making all financial activity between network participants completely public. In contrast, fractional-reserve banking is a closed system in which transaction data is tightly covered by banking secrecy, which has repeatedly served (and will continue to serve) to hide shady deals.

Perhaps the most significant difference between cryptocurrencies and classical banking lies precisely in the issue of openness. Cryptocurrencies are fully transparent, meaning that every transaction is recorded on a blockchain that literally anyone can access. This makes it easier to track transactions, which can be useful in countering fraudulent activity. In contrast, fractional reserve banking is proving organically opaque. Banks do not have to disclose how much money they hold in reserve, instead they can “create” new money without any public oversight. This lack of disclosure has contributed to numerous financial crises, such as the memorable 2008 crash, which was caused by excessive lending and bank speculation.

We can also see the difference between the world of crypto and traditional banking in terms of security. Cryptocurrencies are characterized by high security, thanks to the use of complex algorithms and cryptography resistant to hacking attacks. Crypto transactions are verified by a network of nodes composed of tens of thousands of equal participants, a sizable portion of which keep a complete record of all transactions made since Bitcoin’s inception, making it virtually impossible for anyone to tamper with the history of payment operations. In contrast, banking as we know it well is proving vulnerable to a variety of threats, such as bank robberies, theft of sensitive data belonging to customers, and hacking of accounts and credit cards. Banks also tend to engage in risky lending practices that can lead to the loss of a sizable portion of customer deposits. Not to mention the possibility of arbitrarily blocking savings accounts at the behest of the authorities, as exemplified by the case of Canada under Prime Minister Trudeau – in the reality of cryptocurrencies, such an assault on freedom is not only ideologically impossible, but also technically unfeasible.

Bitcoin = a cure for inflation?

Bitcoin was conceived as an alternative to fiat money; it was intended to eliminate the inadequacies of traditional means of payment. But in practice, can it function as an effective antidote to the problem of losing the value of our savings due to high levels of inflation? It is certainly not a perfect panacea, due to the fundamental pain of a volatile exchange rate. Bitcoin’s value relative to traditional currencies is characterized by large fluctuations, often over even very short periods of time. For this reason, investing in BTC to save savings from inflation will be an attractive option only for people with stronger nerves, who are oriented to long-term movements and acting rationally, that is, investing in crypto only those funds they can afford to lose.

Regardless of the investment risks, cryptocurrencies led by Bitcoin have a significant advantage over traditional currencies when it comes to the potential of storing our wealth in the reality of high inflation. The advantage lies in the organic features of crypto, such as:

• Limited supply: bitcoin has a finite supply of 21 million units, which means it is impossible to “inflate” beyond this limit. What’s more, when this limit is finally reached, the value of a single unit of Bitcoin should only increase due to the difficult availability of this token (the same happens with gold). BTC is a deflationary currency, unlike fiat currencies, which central banks can print at will, leading to a decline in the value of the money we hold.
• Decentralization: Bitcoin is decentralized, meaning it is not directly controlled by any government or financial institution. As a result, it shows high resistance to the effects of inflation caused by government policies and economic instability.
• Security: transactions within the Bitcoin network are secured by cryptography and verified by a decentralized network of computers. This makes it difficult for anyone to manipulate transactions or steal payment units, making it a safe alternative to traditional currencies.
• Mobility: bitcoin is an entirely digital currency, so it can be easily transferred between national borders and exchanged for other currencies at rates that are often more attractive than between fiat currencies.
• Low transaction fees: bitcoin transactions are processed through a decentralized network of computers, meaning there is no need for institutional intermediaries. This leads to lower transaction fees compared to traditional banking systems, and it also significantly speeds up the posting of funds in transactions.

Bitcoin and other cryptocurrencies could potentially serve as an alternative to the traditional fractional reserve banking system. Cryptocurrencies offer users a convenient and efficient way to store and transfer value, and provide a significant degree of anonymity and security unattainable with traditional financial systems.

Cryptocurrencies solve several problems associated with the traditional banking system, including the possibility of a truly dictatorial concentration of power and control by a small group of actors, the risk of government seizure or confiscation of assets, and the possibility of unfair conduct by financial institutions.

In the fight against inflation, should you switch to Bitcoin, buy gold, or maybe still hold on to fiat savings? This is a question that everyone must answer for themselves.

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