Cryptocurrency and Inflation: Everything You Need to Know
In this article, you’ll learn the basics of inflation, the role crypto plays during inflation and how you can use USD-backed stablecoins as a hedge.
TL;DR
Inflation is defined as the process by which the decreasing value of a currency, like the US dollar, leads to an increase in the price of goods and services over time.
In this article, you’ll learn the basics of inflation, the role crypto plays during inflation and how you can use USD-backed stablecoins as a stable hedge against inflation.
You’ve most likely heard on the internet that Bitcoin is designed to combat inflation. But what is inflation? Inflation is the process by which the decreasing value of a currency, like the US dollar, leads to an increase in the price of goods and services over time. In other words, inflation is caused by governments printing more money than is needed, and it’s also the reason why your grandparents always talk about how things used to be cheaper.
Just recently, many experts predicted inflation to rise significantly in 2020 as governments worldwide were forced to inject trillions of dollars to help stimulate a stagnating economy caused by the coronavirus pandemic. However, inflation remained stable, hovering around 1.5% despite the pandemic-induced money printing. But now that economies are reopening and consumer spending is picking up, governments face a difficult task ahead.
Is Inflation Good or Bad for an Economy?
To famous economist John Maynard Keynes, inflation is not a horrible thing in some situations, and can actually 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 rapidly increase while 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 grow rapidly and cause the money in their savings account to decrease in value.
Crypto And Bitcoin’s Role During Inflation
Since inflation has been a constant threat to the value stored in fiat, people often protect themselves by investing in assets that maintain their value over time. Historically, gold has been used as a hedge against inflation, but now crypto has become a more popular alternative over recent years.
Hedging against inflation
Bitcoin is fundamentally a deflationary asset, which is why citizens of countries with unstable fiat currencies are increasingly using it as a store of value to protect against hyperinflation and rising costs of everyday goods and services. Unlike fiat, crypto can’t be manipulated to the same extent by changing interest rates and increased money printing. Most importantly, Bitcoin’s supply will never exceed 21 million which makes it an attractive store of value that is resistant to inflation. While Bitcoin has surged in popularity over the past year, the crypto market’s volatile nature continues to be a polarizing topic.
The crypto market’s questionable volatility
Critics argue that the major reason for the increased institutional money in the crypto market is the overall price appreciation of cryptocurrencies over time. For example, despite suffering a massive drop from its recent all-time-high to around $30,000 in July, Bitcoin was still up 2% for the year. In August, the yearly gain rose to 300%.
However, after Bitcoin’s drastic 45% drop in May, many investors flocked back to gold, viewing cryptocurrency as an immature sector which hasn’t proven itself as a stable asset class nor a safe haven store of value. Any asset used as a store of value and a hedge against inflation require a high level of stability and trust. Although it no longer backs national currencies, gold has established itself in this realm throughout history. In comparison, cryptocurrencies have too much short-term volatility to give investors the same confidence they have in gold.
The Stablecoin Alternative
Cryptocurrencies often experience sudden price movements, which for many, makes them an unattractive store of value. While a 30% drop in price over 24-48 hours is considered rare and disastrous in traditional markets like stocks, these are relatively common events in the crypto market. If you’re hesitant about crypto’s volatile nature, you can consider using secured, fiat-backed stablecoins. Here are different ways stablecoins benefit users in hyperinflationary countries:
Convenient trading
Trading Forex and different fiat currencies is a popular method to combat inflation, and stablecoins offer you an even more convenient way to participate in the market. Unlike traditional currency markets, stablecoins can be purchased 1:1 with USD via wire transfer and, if you’re KYC verified, topping up your Binance cash wallet with other currencies and then converting to stablecoin. You can convert and receive stablecoins like USDT, USDC, TUSD with zero fees. To reduce risk, always use stablecoins that are backed 1:1 by USD.
Day to day transactions
Citizens of hyperinflationary economies often have to deal with a volatile fiat currency. Stablecoins are a great alternative as more merchants and stores are starting to accept crypto as a payment. In fact, fiat-backed stablecoins are becoming increasingly popular in unstable economic markets.
The Bottom Line
Inflation is a complex economic concept that can be good or bad, but the prevailing belief is that it is catastrophic when it becomes too high and spins out of control. Although inflation remained stable during the last year as the Coronavirus pandemic kept businesses grounded, it is expected to rise in the near future as spending increases and economies open up.
As a result, individuals and businesses invest in gold, real estate and other assets to protect themselves from future inflation. Over the last decade, Bitcoin and cryptocurrencies have shown that, like those assets, they too play a role during inflationary periods.
Kickstart your crypto journey with Binance
Get started by signing up for a Binance.com account or download the Binance crypto trading app. Before you start your crypto journey, verify your account to increase your crypto purchase limit. Once you’re verified, you can buy stablecoins on Binance via cash through bank transfer, card channels or e-wallet options.
Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.
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