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Does Inflation Affect Cryptocurrencies?

Does Inflation Affect Cryptocurrencies?

As the pandemic winds down and the world opens back up, we’re seeing a surge in spending and inflation that hasn’t been witnessed since 2008. With the growing concern around inflation, can cryptocurrency begin to fill the traditional role of an inflationary hedge in your portfolio, especially as oil stocks, real estate skyrockets, and gold prices go sideways? GIG will share relevant information on whether inflation affects cryptocurrencies or not in the following article.

Read more: Benefits of paying with cryptocurrency

What is inflation?

Inflation is when currencies lose value over time, causing prices of consumer goods to increase. Because most economists believe that some level of inflation is good for the economy, the government, for instance, has printed more money than consumers need for decades. It’s the reason that a Coke that cost a thousand dong 20 years ago goes for about 8 thousand dongs today. 

One attribute that has made cryptocurrencies so appealing to investors is the idea that they’re more resistant to inflation than fiat currencies. Most cryptocurrencies designed to resist inflation are limited and known (usually publicly available in the Whitepaper); a portion of platform fees will be used to reduce the circulating supply of tokens via token redemption and burn.

How does inflation affect the economy?

To famous economist John Maynard Keynes, inflation is not a horrible thing in some situations and can boost the economy and create new jobs during downtimes. Overall, a low inflation rate stimulates spending, investment, and borrowing—all things essential for healthy economic growth. On the other hand, when inflation spins out of control, it leads to hyperinflation, causing the price of goods and services to increase rapidly. At the same time, wages stagnate, currency purchase power decreases, and living costs become more expensive. 

Higher inflation erodes the value of the money you’ve saved, and lower inflation slows the economy as a whole. For example, citizens of hyperinflationary economies like Argentina, Venezuela, and Zimbabwe have to prioritize spending. Otherwise, price levels overgrow and cause the money in their savings account to decrease in value. 

Does Inflation Affect Cryptocurrencies?

Does Inflation Affect Cryptocurrencies?

A high inflation rate for fiat currencies might lead individuals to invest more in digital money because the dollars or Euros they placed in a savings account are losing value over time. Some cryptocurrencies offer investors an alternative. The economics of the cryptocurrencies market is complex, but some features are designed into the digital currency that may help it resist inflation.

  • Cryptos can’t be manipulated by governments adjusting interest rates or printing more money to achieve policy goals. 
  • Like gold and other scarce stores of value, the conventional wisdom around Bitcoin is that it should rise in price in uncertain times. (This has not always been the case).
  • Scarcity is one key to making a store of value resistant to inflation. For example, there will never be more than 1 billion GIG Dollar. 

What Kinds of Cryptocurrency Can Be Inflation Hedges?

Many cryptocurrencies have a limited supply that can’t be changed, similar to precious metals. The innovation of advanced crypto-financial functions beyond the storage of value also comes in unique ways to use your savings.

Staking, yield farming, and lending platforms are fast-growing crypto industries that allow you to put forward your coins to provide crypto services that can passively grow your savings. Some currencies burn coins as they are transacted to deflate their supply and incentivize holding coins. These functions come at different risks that should be taken into account when constructing a strong cryptocurrency portfolio.

Since the blockchain industry is still relatively new, cryptocurrency prices can be pretty volatile. While this may not be a great way to store value over the short term, prices will continue to rise over the long term if demand continues to increase for cryptocurrency. Since the economics of a coin is written in code and deployed on the blockchain, no entity can decide to print more bitcoin in the future.

The best cryptocurrencies you can use to hedge against inflation are coins with limited supply and strong adoption. The two best cryptocurrencies to use as a hedge against inflation are likely Bitcoin and Ethereum.

Above are GIG’s comments on how inflation affects cryptocurrencies? Hope it helps investors.

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