Inflation and Crypto: What You Need to Know

What is Inflation?

(Source: statitsta.com)

What Role Does Crypto Play During Inflation?

Global inflation has long since affected the value people store in fiat currency, therefore investors have been trying to protect themselves from hyperinflation by investing in other assets that have been known to better stick to their actual values. The precious metal gold is an asset class that is frequently held as a protection against inflation by traditional investors. However, since the emergence of the crypto Bitcoin, crypto assets have become popular as an alternative investment that investors are using as a hedge against inflation.

Is Bitcoin an Effective Hedge Against Inflation?

As Satoshi Nakamoto designed the crypto Bitcoin, it is a deflationary asset, and people in countries that have unstable fiat currencies are using it as a store of value that can provide protection against inflation already. Now, why might Bitcoin- or any other crypto for that matter- serve as a good hedge against rising costs of essential goods and services? There are several reasons to it, such as-

  • Bitcoin or any other crypto- just like gold- is not tied to the value of a particular currency like the US dollar. Plus, Bitcoin is decentralized and not controlled by a group of companies or stakeholders. Instead, Bitcoin is an international asset class that reflects demand across the globe. Therefore, Bitcoin altogether avoids many of the political and/or economic risks associated with fiat financial markets around the world.
  • Bitcoin has a limited supply of 21 million coins, and as of the beginning of 2022, about 19 million of these bitcoins have already been minted. This proves Bitcoin a better inflation hedge than even most other cryptocurrencies, as this way new coins are released into circulation methodically and there will only ever be a certain number of coins, eliminating the risk of inflation.
  • Bitcoin possesses all the qualities that make gold a good hedge against inflation- it’s secure, easily interchangeable, durable, and scarce. However, in addition to all that, Bitcoin is also portable, more decentralized, and transferable. Since the supply of gold is to some extent controlled by powerful countries like the U.S., China, and European countries like Germany, in theory, Bitcoin can also be protected more easily than a precious metal like gold that has physical existence.
  • In countries prone to hyperinflation and political crises, a digital currency like Bitcoin brings forth a much better means of exchange than fiat money.

Stablecoins Can Also Prove to be a Good Inflation Hedge

While cryptocurrencies can serve as a good hedge against inflation, many new investors are hesitant about holding crypto, as the crypto markets are exceedingly volatile. However, in that case, you can consider using stablecoins like USDT for protection against hyperinflation. While they share most features of regular cryptocurrency, stablecoins are usually backed by fiat currency at a 1:1 ratio, like USDT is backed by the US dollar. This makes stablecoins less prone to volatility than regular crypto coins like Bitcoin.

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