The value of the US dollar keeps falling. What does the purchasing power of the US dollar mean for the worth of Bitcoin, which is usually expressed in US dollars? It appears that half of Bitcoin’s capital gain is actually the US dollar losing purchasing power.

Purchasing power of the dollar historically

Over the past 50 years, the worth of the US dollar has fallen quite a bit. The federal reserve was created in 1913. A 100 US dollars in 1913, is only worth about 2,1 US dollars today. Quite a difference.

Some historic events have caused the purchasing power of the US dollar to come down. The Wall Street Crash (Black Thursday) in 1929 had a huge impact on the US dollar. The purchasing power has been declining ever since, reaching an all-time low this year.

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In 1944, The Bretton Woods agreement took place. The agreement between 44 countries entered a fixed exchange rate system. Only the US dollar could be exchanged for gold in American banks. All other currencies got a fixed exchange rate with the dollar, but could not be traded for gold in the bank. This meant the reintroduction of the gold standard.

The Bretton Woods system was dismantled between 1971 and 1973 due to the first oil crisis in 1973. A second oil crisis took place a few years later. Each of them caused a recession in the US and caused the US dollar to drop in value even further.

In the late 1990’s, people strongly believed in internet-related companies and there was an excessive speculation. The Nasdaq composite stock market index rose 400%, only to fall back to 78% from its peak by 2002. The crash caused many internet companies to go under, creating another recession.

nasdaq-historical-chart-2020-09-05-macrotrends 

Nasdaq historical chart – source: macrotrends.net

The USD reaches an all-time low

In 2020, the US dollar got another hit due to, among other things, the coronavirus pandemic. The government has been spending a lot of money on battling COVID-19, which has increased distrust in the US dollar and is making the American economy underperform.

The worth of one Bitcoin is usually expressed in US dollars. At its peak this year, one Bitcoin was worth about 12,000 dollars. This year, the price of one Bitcoin has gone up with approximately 4,800 US dollars (from about 7,200 to 12,000). On the 4th of September, however, the price of Bitcoin has plummeted to about 10,200 dollars, which is still about 3,000 US dollars more than last year.

50 % of Bitcoin’s capital gain due to diminishing US dollar

This seems like an incredible upsurge. We also know, however, that the purchasing power of the US dollar has plummeted. So has the worth of Bitcoin really gone up that much?

Gold has to be the oldest benchmark to compare the value of things. So let’s see how much gold you would get for about 10,000 US dollars of Bitcoin. At this time, one Bitcoin is worth about 5,4 ounces of gold. At the start of September in 2019, one Bitcoin was worth 7 ounces of gold.

Gold vs BTC price – source: buybitcoinworldwide.com

If you translate that back into dollars, compensating it with the rise of gold, it appears that Bitcoin – on its own – would be worth a lot less today. Instead of 10,200 US dollars, we would be looking at a value of around 8,200 US dollars if the purchasing power of the US dollar had stayed the same. That would mean that Bitcoin only rose with 1,000 dollars over the last 12 months. The other “gains” are derived from the ongoing devaluation of the US Dollar.

Bitcoin goes up, the US dollar goes down. You could say these conditions create a perfect landscape for Bitcoin to rise even further in the long haul.