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I'm not understanding how to protect my bitcoin value from inflation. IF I purchase bitcoins with US dollars, how to I educate myself to how to protect the value of my bitcoins in my wallet so that those bitcoins do not lose value, compared to the USD I used to buy them? I'm not looking to use bitcoins as an investment, I just want to know that when I buy and spend bitcoins, their purchasing power is at par with my original USD or higher. How do I educate myself to achieve this? Sources/resources/your personal information. ???

  • I'm not sure what's being asked here, and if it has't been asked before on this forum. – ripper234 Dec 21 '11 at 18:36
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The value of Bitcoins will fluctuate against the dollar -- for a number of reasons, including the price rising as the result of speculation or from demand for the currency. The price can and has dropped -- for various reasons as well.

If you want to hold bitcoins, then you expose yourself to those fluctuations.

If you simply want to use bitcoins for spending without exposure to the fluctuations, here's one method: When you add money to a bitcoin exchange, leave those funds as USDs and only exchange some of those funds to bitcoins at the time that you plan to make your purchase which uses bitcoins.

That way you are not exposed to the exchange rate fluctuations. Do keep in mind that when holding funds at a bitcoin exchange you are trusting that the operator of the exchange is administering properly and keeping your funds (your USDs and your BTCs) safe.

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    Oh, and at some point there will be financial derivatives that will enable protections against the fluctuations. For instance, options are one instrument that let you "lock in" at a certain price, for a fee of course. – Stephen Gornick Dec 21 '11 at 18:03
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    Leaving them as USD is as much of a gamble as buying BTC: you are either gambling for the exchange rate to go up or to go down. – o0'. Dec 22 '11 at 10:46
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    @Lohoris: A dollar has a relatively stable purchasing power. A bitcoin does not. Keeping your dollars is low risk; buying or shorting bitcoins is high risk. – Meni Rosenfeld Dec 23 '11 at 13:30
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Investing in Bitcoin is speculation just like most other form of investments. Assume, you only have two options, USD and BTC, the are two possible outcomes:

  1. The value of BTC goes up against USD. Thus, you win, if you bet all your money on BTC.
  2. The value of BTC drops against USD. In this situation, you loose if you invest in BTC.

They are investment strategies to limit the possible losses. You could try the following strategy:

  • Buy 1 USD worth of BTC.
  • State: "In the worst case, I do not want to loose more than 10% of my investment (in USD)"
  • State: "The yearly inflation rate is 1%"
  • Now, your stop-loss price for your BTC, is 0.9 * 1USD * 1.01^y, where y is the time in years since you have bought your BTC (for 1USD). Initially, this is 0.90USD, rising as the inflation goes.
  • Constantly observe the rate at which you could sell your bitcoin (after all fees). Initially, this is about 1USD (neglecting fees). If this price falls below the stop-loss price, you sell your BTC.

This was you are immune to market risks and (USD) inflation.

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Inflation would increase the value of your Bitcoins. Inflation means the dollars you used to buy the Bitcoins are worth less, thus if the value of the Bitcoins holds steady, they are now worth more dollars.

What you would need protection against is deflation, the dollar gaining value, or the value of Bitcoins dropping due to changes in supply, demand, and hype.

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