If you’ve been following the news, you know that record-breaking inflation is currently one of the top stories, with each month seeing an even more startling increase in prices. However, where do cryptos fall into this story? Some investors consider certain cryptos as a hedge against inflation, similar to gold. Some people think that cryptos are riskier investments, and their price volatility makes them unsuitable during hard economic times. Below we attempt to show a relationship between crypto and inflation and how inflation impacts the economy as a whole.

What is Inflation?

Inflation refers to the overall increment in prices of goods and services in an economy over time, resulting in a decline in the purchasing power of money. In other words, it means that, on average, the cost of goods and services is likely to rise, and each unit of currency can buy fewer goods or services than before.

Inflation is measured through various price indexes, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). These indexes track the changes in the costs of a basket of products and services commonly consumed by households or produced by businesses, respectively.

Is Inflation good or bad for the economy as a whole?

According to renowned economist John Maynard Keynes, inflation can help the economy and create new jobs during recessions and is not always bad. A low inflation rate generally encourages borrowing, spending, and investment, all of which are necessary for sound economic growth. Contrarily, when inflation spirals out of control, it results in hyperinflation, when prices of goods and services rise. Still, incomes stagnate quickly, the purchasing power of currencies falls, and living costs rise.

Your savings lose value when inflation rises, and as inflation declines, the economy as a whole grows more slowly. For instance, those living in hyperinflationary countries like Argentina, Venezuela, and Zimbabwe must prioritize spending because otherwise, prices may rise quickly, depreciating the value of their savings.

Role of crypto during Inflation

People typically take precautions to protect themselves by making investments in things that hold their value over time since inflation has been a constant threat to the value stored in money. In the past, gold was considered a good hedge against inflation, but in recent times, cryptos have emerged as a viable alternative.

Hedging against Inflation

Due to its deflationary nature, Bitcoin is becoming a popular store of value for citizens in countries with unstable fiat currencies. It safeguards against hyperinflation and the increasing expenses of daily necessities. Unlike fiat, crypto is less susceptible to manipulation through interest rate adjustments and excessive money printing. Furthermore, Bitcoin’s limited supply of 21 million coins adds to its appeal as an inflation-resistant store of value. Despite Bitcoin’s surging popularity in recent times, the volatile nature of the crypto market remains a subject of debate.

The uncertain volatility of the crypto market:

Critics argue that institutional interest in the crypto market primarily stems from the long-term price appreciation of cryptos. Despite experiencing a significant drop in July 2022, with Bitcoin falling to around $30,000, it still showed a 2% year-to-date gain. By August, the yearly gain had surged to 300%.

However, Bitcoin’s drastic 45% decline in May prompted many investors to return to gold. They perceived cryptos as an immature sector lacking stability and unproven as a reliable asset class or a safe haven for storing value. Assets used for wealth preservation and inflation hedging require a substantial level of stability and trust. Despite no longer backing national currencies, gold has established itself throughout history in this realm. In contrast, the high short-term volatility of cryptos undermines investors’ confidence, leaving them more trusting in gold’s stability.

Bottomline

Inflation is a complicated economic concept that can be either positive or negative; the general consensus is that it is disastrous when it rises too high and spirals out of control. Although the Coronavirus pandemic hindered businesses from operating throughout 2021, inflation stayed stable. However, it is expected to climb in the coming future as consumption rises and economies expand.

As a result, to hedge against potential inflation, people and companies invest in gold, real estate, and other assets. Over the past ten years, Bitcoin and other cryptos have demonstrated that, like those assets, they have played a crucial role during inflation.