Updated on January 16, 2023 11:14 AM
The rate at which prices grow over a specific time period is known as inflation. Inflation is often measured in broad terms, such as the general rise in prices or the rise in a nation's cost of living. The general characteristics of inflation include a rise in the cost of consumer items and a gradual decline in the value of currencies. Cryptocurrencies like Bitcoin often have low rates of inflation due to their restricted supply.
Additionally, when inflation increases, it requires a greater number of units of currency to purchase the same quantity of goods and services. This is known as the loss of buying power of the economy's currency.
In some circumstances, inflation is not a bad thing; in fact, it may stimulate the economy and add employment when it is in a recession. A low inflation rate generally encourages borrowing, spending, and investment, all of which are necessary for strong economic growth. Contrarily, when inflation spirals out of control, it results in hyperinflation, which causes prices to rise quickly while wages remain flat, the purchasing value of currencies drops, and living expenses go up. Your savings lose value when inflation rises, and as inflation declines, the economy as a whole grows more slowly.
Every good or service is impacted by inflation, including utilities, cars, food, health care, and housing. Because inflation essentially devalues currency, it has an impact on both corporations and individual customers. In other words, inflation lowers a consumer's purchasing power, depreciates savings, and puts off retirement. Global central banks keep an eye on inflation so they can react appropriately. For instance, the US Federal Reserve has set a 2% inflation objective. In order to combat inflation should inflation rates exceed the desired level, the system modifies its monetary policy.
People frequently take measures to safeguard themselves by investing in assets that hold their value over time since inflation has been a persistent danger to the value contained in money. Historically, gold has been regarded as a hedge against inflation, but in recent years, cryptocurrencies have gained in popularity as an alternative.
Volatility of the crypto market is debatable:
According to critics, the general price growth of cryptocurrencies over time is the main driver of the rising institutional investment in the cryptocurrency sector. For instance, Bitcoin was still up 2% for the year despite a sharp decline from its most recent all-time high to almost $30,000 in July. The annual gain reached 300% in August.
However, following Bitcoin's sharp 45% decline in May, many investors began to consider the cryptocurrency market as an unproven asset class and safe haven store of value. Any asset utilised as a money market or inflation hedge must have a high degree of stability and confidence. Despite not supporting national currencies anymore, other assets have made their mark in this field throughout time.
Because bitcoin is basically a deflationary asset, people in nations with unstable fiat currencies are utilising it more and more as a store of value to guard against hyperinflation and rising prices for basic goods and services. Cryptocurrencies, unlike fiat, can't be as easily manipulated by increased money production and interest rate changes.
Most significantly, because there will never be more than 21 million bitcoins created, it is a desirable inflation-resistant store of wealth. Despite the rise in popularity of Bitcoin over the past year, there is ongoing debate over the volatility nature of the cryptocurrency market.
Even though the dynamics of the Bitcoin market are complicated, some cryptocurrencies, like as Bitcoin, are built to either resist inflation or have predictable, low rates of inflation. Additionally, although Bitcoin is frequently hailed as a hedge against inflation, recent economic changes have seen Bitcoin's performance as a pure hedge decline.
Cryptocurrency has increasingly matched market trends thanks in large part to institutional investors. This implies that Bitcoin will probably decrease along with the market when it does.
Thus, the Federal Reserve will probably implement a dual mandate when inflationary news arises. There will be a rise in policy interest rates and a tightening of the financial system. Asset prices will therefore drop, including those of cryptocurrencies like Bitcoin.
Even Bitcoin, which is generally seen as "inflation-resistant," experiences inflation. Bitcoin undergoes inflation when more of it is produced, much like gold does. However, because the cost of mining new Bitcoin is automatically cut by 50% every four years, ultimately inflation rates will also fall.
Investors often don't give much thought to Bitcoin's normal yearly inflation rates as long as its value is still increasing relative to fiat currencies. However, the performance of other cryptocurrencies can vary.
For example, stablecoins, which are tethered to fiat currency, are a low-volatility cryptocurrency that may be used to store value. Stablecoins, however, are equally vulnerable to inflation and can lose value over time. The stablecoins depreciate in value together with their reserve currency.
Cryptocurrencies like Bitcoin also provide excellent alternatives to traditional inflation hedges like real estate as well as other assets like gold and silver.
Bitcoin is more of a "inflation-resistant" asset than "inflation-proof," which implies total impenetrability against any outside influences. Since it is the biggest and longest-running cryptocurrency, Bitcoin is typically seen as an excellent inflation hedge. It may even be thought of as a superior hedge to other investments. Bitcoin has greater long-term growth potential and hence protects against inflation despite being more volatile than traditional investments. Well, these are the reasons:
Like other assets, bitcoin is not a part of a particular economy, nation, or currency. It is a worldwide asset class that reflects demand all across the world. Because it does not have to cope with the numerous economic and political dangers connected with stock markets, bitcoin is a better alternative than shares.
Although inflation is a complicated economic notion that may be either positive or harmful, the general consensus is that when it rises too high and spirals out of control, it is devastating. Although the Coronavirus pandemic hindered businesses from operating throughout the last year, inflation stayed steady during that time. However, it is anticipated to climb in the near future as consumption rises and economies expand.
In order to safeguard themselves against future inflation, people and companies invest in real estate and other assets. Bitcoin and other cryptocurrencies have demonstrated over the past ten years that, like other assets, they have uses when there is inflation.
But what role does inflation play in cryptocurrency? Increased investments in digital currencies may result from high rates of fiat money inflation, which allays consumers' concerns that their money would eventually lose value. Investors who wish to diversify their investment portfolios have a wonderful option in cryptocurrencies like Bitcoin (BTC) and Ether (ETH).
Does Bitcoin go up with inflation?
The cost of bitcoin will often decrease when inflation rises. The price of assets, including bitcoin, will climb if inflation "slows," as would be the case with a positive reading of the American consumer price index, with the expectation that the Federal Reserve and other central banks will hold off on raising interest rates.
Why is crypto immune to inflation?
A rise in the price of consumer goods and a slow drop in the value of currencies are two general signs of inflation. Due to their restricted supply, cryptocurrencies like Bitcoin frequently have low inflation rates, making Bitcoin trading profitable.
Why is Bitcoin not rising with inflation?
One of the primary selling points for Bitcoin is that it is an inflation hedge, suggesting that its value would remain stable over time. One explanation is that the cryptocurrency's supply is limited to 21 million units, which leads to scarcity as demand rises.
Is Bitcoin recession-proof?
Since its inception in 2009, Bitcoin has shown to be resistant to changes in the economy. A U.S. economic slowdown has less of an impact on Bitcoin's negative risk due to its extensive worldwide diversification.
Is cryptocurrency good during inflation?
Although gold and cryptocurrencies have been dubbed "inflation-proof" assets, they don't appear to be a good hedge so far in 2022. Although gold and cryptocurrency are sometimes grouped together as assets that are resistant to inflation, neither one has fared well in the face of rising costs in 2022.
Who benefits from high inflation?
Investors may profit from inflation despite slow economic growth rates provided they have the right stocks and commodities in their portfolios. Equity investors, as investing in equities is significantly better than keeping cash when inflation is high.