Ask CryptoVantage: Is Buying Bitcoin the Same as Shorting the US Dollar?

What it Means to “Short” the US Dollar

The technical definition of “shorting” in finance is selling assets at the current price in advance of owning them. The goal is to make a profit if/when the price of those assets falls lower in the future. However, the term is often used more loosely as a way of saying you are betting that the price of a certain asset will decrease over time.

In this article, we are answering the question of whether purchasing bitcoin can be seen as betting that the US dollar will decrease in value relative to bitcoin’s change in value over the same period of time.

The Case for Shorting the US Dollar

Many people buy bitcoin as an alternative to keeping cash in savings because they believe the dollar’s value is decreasing. This is almost always true, as the Federal Reserve’s goal is to maintain 2% annual inflation. This means that everything valued in US dollars becomes 2% more expensive each year. Economists believe that a small amount of inflation is good for the economy because it promotes spending, rather than holding onto cash. An annual inflation rate reduces the value of any dollars held in savings. For this reason, it is well known that holding your savings in dollars is not a good option for long-term savings. This is especially true when you factor in the compounding effects year after year.

Most economists use the Consumer Price Index (CPI) as the measure of inflation, but many people argue that this is not an accurate reflection of what true inflation is. If you look at where most Americans spend their money you can tell that inflation is higher than reported by the CPI. In addition, there has been a recent increase in the rate of money printing in the US as a response to the COVID-19 pandemic. This has caused many people to speculate that in the coming years the rate of inflation will be much higher than average. The higher the rate of inflation, the worse the US dollar becomes for savings.

In contrast to the US dollar, bitcoin cannot be inflated because there is a finite supply of coins. There will only ever be 21 million bitcoins, and due to the nature of the system that makes bitcoin what it is, more bitcoins can never be made. So, for as long as the demand for bitcoin increases, it is likely that the value of bitcoin will increase as well.

Annual inflation of the US dollar is highly likely, so if you keep your money in a savings account, it can be expected its value will decrease year after year. However, if you believe that bitcoin’s value will continue increasing with time, it can be a good alternative for storing your money. But keep in mind, it is not guaranteed that bitcoin’s value will increase over time, and it is a highly volatile currency which means it commonly fluctuates in price greatly. For this reason, it is typically recommended to only keep a portion of your savings in bitcoin, and to hold it long-term in order to realize an increase in value.

Key Take-Aways

• If you are putting your money into bitcoin as an alternative to keeping your money in US dollars, then buying bitcoin can be seen as being the same as shorting the US dollar.
• The US dollar is almost always subject to around 2% inflation each year (or higher, depending on how you calculate inflation), which decreases its value and makes it a poor place to store your savings long-term.
• Bitcoin will never be subject to inflation due to increased money supply because there will only ever be 21 million bitcoins.
• If you believe that bitcoin’s value will increase over the time you plan to hold onto your savings, then it may be a good place to store your value because it can act as a hedge against inflation.
• Typically, we advise that you consider bitcoin as a long-term savings option.