Inflation is one of those economic events that we encounter daily.
However, there are occasions when this can spiral out of control, posing a serious threat to our finances. Is it really possible to fight inflation with cryptocurrencies?
There are numerous strategies to combat inflation; often, consumers do so by purchasing strong currencies such as the dollar or the euro. Regrettably, these are not inflation-proof; a recent example is the recent surge in inflation in the United States.
That is why investors and a large number of other individuals have turned to cryptocurrencies as a means of protecting themselves from inflation. However, there are numerous reservations regarding the extent to which cryptocurrencies can act as a hedge against inflation.
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The inflation-hedging potential of digital currencies.
Numerous factors contribute to individuals investing in cryptocurrencies and their widespread adoption. While some invest in cryptocurrency just because it has established itself as a dependable asset class, others do so to diversify their portfolio.
Individuals and institutional investors, on the other hand, are increasingly looking to cryptocurrencies as a hedge against inflation. In October 2021, inflation reached a 31-year high in the United States, sparking concerns. Could cryptocurrency give the necessary cushion?
Increasingly, experts and the cryptocurrency community believe that cryptocurrencies can assist countries experiencing an inflation issue. For example, the dramatic depreciation of Turkey’s national currency, the Lira, has many believing that crypto can save their economy from impending calamity.
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MicroStrategy CEO Michael Saylor stated that Bitcoin, the world’s largest cryptocurrency by market capitalization, was Turkey’s only hope.
Not long ago, JP Morgan wrote in an October note to investors, “Bitcoin is looking more and more like the new gold in terms of inflation hedges.” The resurgence of inflation fears among investors has rekindled interest in using Bitcoin as a hedge against inflation.”
It is critical to understand why many feel cryptocurrencies will save the world as inflation continues to increase.
Cryptocurrencies as a haven.
In the last decade, cryptocurrency has proven to be a superior alternative in countries prone to hyperinflation and political unrest such as Zimbabwe, Argentina, and Venezuela.
Venezuela and Zimbabwe’s hyperinflation since 2008 serve as a reminder of the fragility of fiat currencies. Fiat currency’s value is contingent upon the citizen’s good faith and creditworthiness in the economy.
However, when countries print too much money, individuals lose faith in the currency, which devalues overnight. When the value of fiat currency falls, inflation increases and cryptocurrency may be the solution to this dilemma.
Cryptocurrency developed as a viable alternative to the damaged traditional banking system, particularly in Venezuela during a period of hyperinflation and US sanctions. From remittances to wage protection and cash flow management in a declining economy, crypto became the currency of choice and empowerment.
See also: Is Bitcoin still a good investment in 2022?
What makes cryptocurrency inflation-resistant?
As evidenced in the aforementioned countries, Bitcoin has the potential to be a viable alternative to a central bank-controlled economy. Here is why:
1. Limited availability
The restricted supply of cryptocurrencies is one of the primary reasons they provide a stronger shield. The majority of cryptocurrencies have a fixed supply, which implies that no new coins/tokens may enter circulation, hence preventing inflation from occurring.
On the contrary, countries can use fiat to expand the money supply by spending or purchasing government bonds at discounted interest rates. However, this diminishes spending power and may result in inflation.
2. At the core of cryptocurrencies is decentralization
While each country’s central bank controls the supply of fiat currency, cryptocurrencies lack a centralized entity to regulate supply. Rather than that, supply rules are embedded in the technology and are not constrained by conventional economics. Additionally, cryptocurrencies’ protocol and process are completely transparent, allowing ordinary folks to monitor and track the generation of new coins in real-time.
What do cryptocurrencies imply to the average person?
Consider the following ways that cryptocurrencies can improve an average man’s daily life:
1. Banking the unbanked: Cryptocurrencies have the potential to aid the world’s unbanked or underbanked population, which does not have access to traditional financial services. This category is fundamentally deficient in terms of the ability to save, send, and receive money. However, the world of decentralized finance (DeFi) created on the blockchain has the potential to provide financial inclusion for those individuals.
2. Mode of remittance: Migrant workers frequently pay exorbitant costs to send money to their relatives using wire money services. Numerous cryptocurrencies enable rapid cross-border transactions at a fraction of the cost required to overcome this barrier.
3. Financial Help: For the poorest sections of the world, obtaining financial support in the form of a bank loan is impossible. Fortunately, for people lacking KYC or credit scores, there are bitcoin companies that offer decentralized borrowing and lending services via smart contracts and collateral.
From Gold To Cryptocurrencies
Historically, the majority of people have used gold, silver, and precious metals as a means of preserving their assets. However, not everyone has the same potential to save or invest in gold, which has pushed the majority of people to pursue a more exciting alternative, cryptocurrencies.
Indeed, a Bloomberg report indicates that an average of $10 billion has been taken from gold accounts. This has resulted in a decrease in its price. But perhaps most significantly, a sizable portion of that money has been invested in bitcoin and other cryptocurrencies.
See also: Solana Price Prediction for 2022.
Cryptocurrency volatility
The most common reservations about investing in cryptocurrencies are due to their volatility.
It’s no secret that if you invest ten dollars in bitcoin over the course of a week, you could end up with twenty or nothing. That is why many are afraid to invest. On the other hand, investing in cryptocurrency could be the prudent move of the century.
Unlike fiat currencies, where governments can grow or decrease the money supply at will or for political expediency, bitcoin has a finite supply of coins. That limit is 21 million bitcoins, and once it is achieved, the currency’s value will increase.
This means that, while bitcoin’s value fluctuates, it tends to increase over time. As a result, it is an excellent option to protect your capital from inflation.
Numerous investors have shifted to cryptocurrencies to hedge against inflation.
Nowadays, more people trust cryptocurrencies than their home country’s currency. This suggests that a large number of people are investing in cryptocurrencies.
