Bitcoin vs inflation

Your pay went up and you still feel poorer. This is the article about why that happens, what the numbers actually are, and the honest case for and against Bitcoin as a defence against it — including the year the defence completely failed.

You are not imagining it

Rent, groceries, insurance, electricity and school fees all cost more than they did five years ago. Your pay has probably risen too, just not as fast, and not on the same things. Nobody sent you a bill for the difference. Your bank balance still reads the same number at the end of the month. It simply does less.

The word for this is inflation, and the most useful thing to understand about it is that it is not weather. It is not something that happens to an economy the way rain happens to a picnic. It is mostly a consequence of decisions — about interest rates, about government spending, about how much money exists — taken by people you did not vote for and cannot appeal to.

What inflation actually is

Two definitions get used interchangeably, and keeping them apart is worth the effort.

The symptom is prices going up. That is what the official figure measures. A statistics agency picks a basket of things a typical household buys — food, rent, petrol, a haircut, a bus fare — prices the basket every month, and reports how much more it costs than a year ago. That is the Consumer Price Index, and it is the number in the news.

The cause is usually more money chasing the same goods. If the amount of money in the system grows faster than the amount of stuff to buy, each unit of money commands less stuff. Nothing about the houses, the food or the petrol has changed. The measuring stick shrank.

This is also why the official figure so often feels wrong. It describes an average basket, and nobody buys the average basket. If your rent, your insurance premium and your childcare have all jumped, a headline of 2.6% will feel like a lie even when it is calculated correctly — because the things that dominate your budget are not the things that dominate the index.

The numbers

Here is what US consumer price inflation has actually done, which is worth seeing because the calm decades and the violent years look nothing alike.

Note the third column of 2023. Inflation coming down does not mean prices coming down. It means they are rising more slowly. The 2021 and 2022 increases are permanent unless something goes badly wrong, which is precisely why the era still feels expensive after the headline number normalised.

Why a small number matters

2.5% sounds like nothing. Compounded, it is not.

At 2.5% a year, prices roughly double in 28 years — meaning a dollar loses about half its purchasing power over a working life, in the calm scenario, with nothing going wrong at all. You can see this in real data rather than arithmetic: $100 in 1990 buys roughly what $250 buys today. A 1990 dollar is worth about 40 cents.

That is the whole reason this site exists. Not because prices rise — everyone knows prices rise — but because a number that is too small to notice each year is enormous over the period you are actually saving across.

Where the extra money comes from

In March 2020, governments and central banks responded to the pandemic by creating money on a scale with no modern precedent. The broadest common measure of US money supply went from about $15.4 trillion at the start of 2020 to about $21.7 trillion two years later — roughly 40% more dollars in twenty-four months.

Nobody's house got 40% bigger. The number of cars, hours of labour and tins of beans did not jump. Predictably, and with the usual lag, prices did what the table above shows. You do not have to have a view on whether the decision was correct to notice that it was a decision, taken by a handful of people, whose cost was distributed silently across everyone holding the currency.

What "safe" savings actually do

Here is the arithmetic that nobody puts on a savings account brochure. If your account pays 2% and inflation runs at 3%, your balance grows and your purchasing power shrinks by about 1% a year. You are not standing still. You are losing slowly, in a way that produces a bigger number on the statement every month.

It is slightly worse than that, because in most countries you pay income tax on the 2% you earned and no allowance at all for the 3% you lost. Cash is the one asset whose decline is guaranteed in advance and taxed on the way down.

None of which makes cash useless. Cash is what you hold for the next three months, for the emergency, for the thing you know is coming. It is a terrible place to put money you will not need for twenty years, and an essential place to put money you might need on Tuesday.

Bitcoin's opposite rule

Bitcoin was built with the reverse property, and this is genuinely the entire argument for it.

The supply is capped at 21 million, the schedule was fixed in 2009, and the rate of new issuance halves every four years. New bitcoin is currently created at under 1% a year, and that rate halves again in 2028, then again, until it stops. No committee can vote to change it. There is no emergency that unlocks more. How that works mechanically is its own article.

So you have two systems side by side. One expands its supply at the discretion of officials responding to circumstances. The other cannot expand beyond a number that was public before anyone owned any of it. If you think scarcity is what makes a store of value, that difference is the whole story.

Where this argument breaks

Now the part that most pages about Bitcoin and inflation quietly leave out.

2022 was the test, and Bitcoin failed it. US inflation hit a 40-year high of about 9% in the middle of that year — the exact scenario an inflation hedge exists for — and Bitcoin fell roughly 65% over the same twelve months. It did not protect anyone. It behaved like a high-risk technology asset, sold off when interest rates rose, and did so precisely when the thesis said it should have held.

The honest version of the claim is therefore narrower than the slogan. Over its full history so far, Bitcoin has vastly outrun the decline in the purchasing power of every major currency. Over any given year, it has no reliable relationship with inflation at all, and has repeatedly moved hard in the wrong direction. It is a long-horizon argument about scarcity, not a hedge you can lean on when you need one.

And it is an argument that might be wrong. Scarcity only creates value if people keep wanting the scarce thing. There is no cashflow underneath it, no earnings, no dividend — nothing that establishes a floor if sentiment turns for a decade. Bitcoin has fallen more than 70% from a high on several separate occasions, and more than 80% on three of them. Any of those would have wiped out years of protection against a 2.5% annual erosion.

Reading the calculator's number properly

The result on the front page is a nominal figure: actual dollars, at actual prices, with no adjustment for what those dollars are worth. If a run shows 12% a year over a decade in which inflation averaged 3%, your gain in purchasing power was closer to 9% a year. Subtracting inflation from the nominal return is the rough version of that adjustment, and it is close enough to be worth doing in your head every time you look at a return.

Two more things about that figure. It is a money-weighted return, which accounts for the fact that money you added last month has not had the same time to work as money you added in 2018 — a plain start-to-finish growth rate would flatter the result badly when contributions rise. And it is computed from daily closing prices, so it will differ slightly from the live price ticking in the header.

Why the calculator raises your contribution

By default it increases what you put in by 2.5% a year, and everything above is why. A flat $100 a week is not a flat effort — after twenty years of ordinary inflation, that $100 asks about half as much of you as it did on the day you started. Raising it keeps the effort constant in real terms, which is also roughly what happens naturally as pay drifts up.

2.5% is not an official target, and the site will not pretend otherwise. The US Federal Reserve's longer-run goal is 2%. 2.5% is an approximation of what inflation has actually been: about 2.5% a year on average across 1990–2018, and about 2.6% in 2025. The same figure is used for every currency the calculator supports, so the default does not shift under you when you switch. Set the box to 0% if you would rather model a contribution that never changes.

The summary you can actually use

Holding cash for a long time is a guaranteed slow loss, and that is arithmetic, not opinion. Bitcoin is not a solution to it — it is a high-variance bet that a fixed supply will be valued, which has paid extraordinarily well so far and has come with falls that most people did not sit through. Both of those sentences are true at once, and anyone telling you only one of them is selling something.

This site does not tell you what to do. It shows you what a specific, boring, mechanical habit would have produced against real prices, and it tries very hard not to flatter the answer.