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What Happens To A Currency When The Rate Of Monetary Inflation Is Suddenly Dropped To Half?

|Includes:UDN, PowerShares DB USD Bull ETF (UUP)

With many fretting over the fact that helicopter Ben under QE3 is increasing the monetary base by nearly $1 million every minute (!!) there is a currency where the opposite is about to happen.

In five days and a few hours from now, the block reward will drop from 50 BTC to 25 BTC which - exactly as planned - means that the annualized rate of monetary inflation in the bitcoin currency will drop from 33%/yr to 12.5%/yr.

This event (which roughly coincides with the four-year birthday of the bitcoin system) marks the historic turning point when exactly half of all the bitcoins - to ever exist - have been issued. The other half will be issued asymptotically over the coming decades with the next 25% in coming four years and 12.5% in four years after that and so on.

(click to enlarge)Fig 1. Deterministic money. - Total bitcoin vs. time. Click to enlarge

Fig 1: Bitcoin vs. time. The supply of bitcoin is entirely deterministic - and cannot be printed by any central bank or otherwise inflated by decree.

The fact that the bitcoin supply rate is about to be cut in half may naturally be the cause for the recent increase in the bitcoin price, but we can't know for sure about cause and effect. The reason is that Wordpress - which according to Alexa ranking is the 22-most visited website globally - recently started accepting (enthusiastically suppoting, actually) bitcoin and such great news might also be helping bitcoin along. But then again - it could also be a reaction to the fact that ECB now has started to discuss bitcoin in a serious way.

Whatever the cause(es) - the bottom line is that the future is bright for bitcoin and its purchasing power.

(click to enlarge)Open source, deterministic-supply, borderless money - vs. government decree money. Which is more "solid" in the long run? Click to enlarge

Fig 2: Government decree money (Zimbabwe- and US-dollars) vs. open source-, deterministic, borderless and frictionless money.

Bitcoins are currently worth roughly 12 USD/BTC (up 140 % YTD) and may be bought in 700,000 locations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long Bitcoin.

Stocks: UUP, UDN