The impact of inflation on cryptocurrency

By: Sruthi Menon

We often recall the good old days when things were way cheaper.

Petrol, essential commodities, and even grocery items have become more expensive than ever.

This shows that inflation has grown at the fastest rate in decades. Inflation happens when the value of a currency decreases, leading to an increase in the price of goods and services over time.

When the coronavirus pandemic struck in 2020, inflation had shot up significantly because of governments infiltrating billions and trillions into the economy in a bid to stimulate growth.

The threat of inflation often causes people to seek means of solidifying their assets. Owing to the constant threat of instability to savings in fiat, people often choose to invest in assets like precious metals like gold or property with a value that will not diminish over time.

Cryptocurrency has become increasingly popular as a hedge against inflation over the past few years.

The acceptance and popularity of cryptocurrencies are rapidly growing. It has become a youthful investment asset class. This could mean that Bitcoin and other cryptocurrencies have the potential of becoming major financial players in the future. But what role it plays in a world with persistently high inflation needs to be explored.

Crypto’s rise in 2021 led some people to believe that digital assets could serve as a stable investment. But in May 2021, Bitcoin’s value dipped by 45%, which led several investors to view cryptocurrency as an immature and volatile sector that fell short of traditional benchmarks for investor confidence.

Despite a massive drop in value, bitcoin managed to rise in value by 2% in 2021. In August 2021, the price of Bitcoin rose by 300% and climbed steadily from then. In 2022, One bitcoin is worth around USD 40,000 (INR 3 lakh).

Critics contend that the sharp rise in institutional interest in crypto investments has mainly been driven by the overall price appreciation of crypto assets over time.

Crypto’s risk is difficult to compare with the existing traditional form of investments as its past is too short to be predictive of its future performance. But there is no denying that the underlying technology of blockchain has the potential to transform our daily financial transactions and beyond.

Bitcoin as a store of value

A store-of-value asset class seldom loses its value, like Bitcoin. As the market players and the markets mature, all stakeholders have started differentiating Bitcoin from the multitude of other cryptocurrencies as a real store of value.

For Bitcoin and crypto to be actually hedging inflation, there needs to be some metrics that need to be adopted, just like in the stock market. Stock markets have price-to-earnings and other matrices, but it is still not standardized and adopted in the crypto space.

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