HYPERBITCOINIZATION: Adjusting prices for inflation
Inflation is a measure of a currencies devaluation over time. It is determined by the consumer price index (CPI) which itself is a record of the cost of a standardised basket of goods over time. CPI figures are recorded monthly by governments. Here I use the CPI of the USA.
Economists call a price which has been adjusted for inflation the real price. To adjust the price P the formula is simple:
P_adjusted = CPI_today / CPI_date * Price_date
What this means is that the adjusted-for-inflation price (P_adjusted) for, say, Dec 2014 is equal to the CPI value today (CPI_today) divided by the CPI for Dec 2014 (CPI_date) * the price for Dec 2014 (P_date). Do this for every month in your set.
You can see that for Bitcoin this adjustment makes very little difference to the price, because Bitcoin is very young. But if you do this for say gold you can really see how inflation affects value over time.
In fact when we adjust for inflation, the 2012 bubble was in fact less dramatic than the 1980 bubble - no wonder, that was the peak of 1970s hyperinflation. Gold was in demand, yet inflation continued to grow steadily since then, meaning today's dollar is worth less than even a 1970s dollar.
Going back to Bitcoin, you can move the crosshairs on the main chart and compare prices for a given date. Check the Dec ATH for instance. The price difference will give you an idea of how much the dollar has been devaluing since then. The following chart shows that using July 15 2018 (today) as the reference date, the dollar has lost 14% of its value in real terms since 2010 when Bitcoin trading started.
Economists call a price which has been adjusted for inflation the real price. To adjust the price P the formula is simple:
P_adjusted = CPI_today / CPI_date * Price_date
What this means is that the adjusted-for-inflation price (P_adjusted) for, say, Dec 2014 is equal to the CPI value today (CPI_today) divided by the CPI for Dec 2014 (CPI_date) * the price for Dec 2014 (P_date). Do this for every month in your set.
You can see that for Bitcoin this adjustment makes very little difference to the price, because Bitcoin is very young. But if you do this for say gold you can really see how inflation affects value over time.
In fact when we adjust for inflation, the 2012 bubble was in fact less dramatic than the 1980 bubble - no wonder, that was the peak of 1970s hyperinflation. Gold was in demand, yet inflation continued to grow steadily since then, meaning today's dollar is worth less than even a 1970s dollar.
Going back to Bitcoin, you can move the crosshairs on the main chart and compare prices for a given date. Check the Dec ATH for instance. The price difference will give you an idea of how much the dollar has been devaluing since then. The following chart shows that using July 15 2018 (today) as the reference date, the dollar has lost 14% of its value in real terms since 2010 when Bitcoin trading started.
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