Inflation has been around for centuries.
Some say that the first record of inflation dates back to the 15th century, but examples reach centuries further.
When King Mansa Musa, one of the wealthiest people in the world, visited Cairo in the 14th century, he gave out so much of his gold to the common people that he triggered massive inflation.
One thing is sure – inflation is no new concept.
So when in mid-2021 countries saw some of the most significant inflation rates in decades, many turned to crypto as an inflation hedge.
But is crypto inflation immune?
That’s precisely what we’ll cover in this blog post.
Are you looking to get your hands on some cryptocurrency and battle the high inflation rate? Then it’s essential that you understand inflation. Before we go into more detail, let’s get the basics covered. What is inflation? How does inflation work? Generally speaking, inflation is used to refer to a gradual increase in the cost of goods and services. As prices rise, living becomes more costly than before.
Many factors trigger inflation, such as the increased money supply in the economy. Other times global crises can trigger inflation, as was the case with the Covid pandemic.
The Consumer Price Index (CPI) typically measures inflation as a percentage change in the average price level of an array of products and services. Through various monetary measures, including interest rate changes and money supply management, global central banks ensure that inflation is stable and moderate, typically around 2% annually. Contracted workers also receive an annual increase in salary to compensate for this minor yearly inflation.
However, there are times when inflation exceeds 2%, as is currently in 2023, at around 5%. This is an improvement from last year’s 6.5%. As a result, many investors are turning toward the cryptocurrency market, looking for an asset class that provides some immunity to these price peaks.
Inflation can affect the economy in both positive and negative ways. While excessive inflation might eventually cause economic instability by reducing consumer and company confidence, moderate inflation can promote spending and investment. With all this in mind, is it possible that cryptocurrencies experience inflation? Is there such a thing as a crypto inflation hedge?
Cryptocurrencies and the Crypto Inflation Hedge
To explain whether crypto inflation is possible, we must examine their nature. For example, Bitcoin is a decentralized currency. It means that a bank or other authority doesn’t govern it. Already you can see crypto stands out from fiat currencies. In addition, Bitcoin and coins like Bitcoin have a limited supply. Inflation cannot affect the maximum limit of the supply pool since it cannot be changed or increased beyond a certain point.
However, when we discuss crypto inflation, we really need to focus on the type of coins we are talking about, as some can be affected by crypto inflation. For example, stablecoins, which are set to the value of fiat currencies, are inherently inflationary cryptocurrencies. Other types of crypto use what is called a “proof-of-stake” to confirm transactions and create more tokens (units) of the currency. This indicates that inflation may result from a rise in the cryptocurrency’s total supply as time passes.
So it’s about choosing the proper crypto to get that inflation hedge you want. It’s also important to remember that factors other than inflation can affect the value of cryptocurrencies. These include crypto market demand and technological advancements. While these can cause the price of crypto to peak, others can dip it in the opposite direction.
Is Crypto Immune to Inflation?
Overall, as inflation rises, crypto can be somewhat exempt from monetary inflation. But as we said, not all digital assets resist inflation. Digital currencies like Bitcoin, Ether, and Litecoin, which are limited in supply, can be less prone to price inflation.
Other cryptocurrencies, like Monero, attempt to combat inflation by having a fixed increase in supply each year. In the case of Monero, this rate is 0.87% per year. This percentage will get smaller over time when the supply reaches its limit.
It’s crucial to remember that while these processes can aid in reducing inflation, they cannot ensure that a cryptocurrency will hold its value or continue to be resistant to inflation. Several variables, like market demand, adoption rates, and legislative changes, can impact the value of cryptocurrencies.
The Perks of Choosing Crypto While Inflation Continues
Decentralization and limited supply are some of the benefits of crypto, however, these anti-inflationary assets have other surprising benefits:
Some experts argue that cryptocurrencies are a better alternative to gold. While gold is just as scarce and secure, Bitcoin is a better option if you value portability and want to transfer your assets quickly for one reason or another. Furthermore, since crypto is decentralized, anyone can access it. Deflationary cryptocurrencies are a practical choice for anyone who wants to guard their wealth against inflation.
Potential for Growth
To top it all off, you could earn staking rewards from your crypto assets. The Bitcoin market is notoriously volatile, and just as prices can enter the red, they can also enter the green. Cryptocurrencies have the potential to grow quickly because they are an emerging asset class. An increase in capital may benefit investors and help counteract the consequences of inflation.
Last but not least, storing crypto investments in digital wallets makes them ultra-safe, away from the prying eyes of hackers and thieves. You can access them from the comfort of your home, so you won’t need to visit a bank should you need to make an instant transfer.
Where to Buy Crypto?
With all this in mind, how does one begin crypto investing? As more and more people become subject to online scams, this has become a popular topic. Visiting a reputable exchange or crypto brokerage is essential to avoid scams. Most crypto experts advise that you visit popular platforms, like Immediate Granimator, to ensure you are in good hands. Brokerages like Bitcoin Profit not only use advanced AI to pair you with a crypto broker in your area but also provide you with top-tier trading tools that will sufficiently aid you in levelling up your crypto experience.
From there, the experienced broker can help you with trading tools and advice, as well as aid in setting up accounts for your investment. Some brokers even offer unique trading opportunities that you otherwise won’t be able to find. The best part – they save you time researching the top trading tools or crypto market trends. To top it all off, they’re also available 24/7 to answer your queries.
You may also purchase crypto from crypto exchanges if you have done all this research already. Currently, a popular and safe place to buy new Bitcoin is the Kraken exchange.
What Happens to Crypto During a Recession?
Let’s not forget that Satoshi Nakamoto, who gave birth to the first crypto – Bitcoin, did it as a response to the 2008 financial crisis – a peak example of a significant recession. While banks worldwide collapsed, investors who wanted to avoid central banks and authorities found Nakamoto’s asset to be the perfect alternative.
There can be plenty of negative consequences to a recession. However, crypto remains recession-proof because it is not limited to a single country and its losses (or gains) do not affect it. The US dollar is a different story. It is susceptible to both the perks and drawbacks of the economy.
Finally, crypto has value despite the state of the economy. This is brought on by the security and rarity of the asset. Additionally, it is easily transferable. If you’re unsure which currency to use, experts believe Bitcoin would fare better in a downturn than other cryptocurrencies like Ethereum.
All in all, cryptocurrencies can provide a safe haven for investors that wish to protect their wealth from inflation. While there are plenty of options to invest in, Bitcoin is the largest cryptocurrency and can promise a more stable future for your investments, unlike stablecoins.
Although cryptocurrencies are not completely immune to inflation, they can act as a hedge against it in some situations. The fact that cryptos are not as prone to inflationary pressures as fiat money may help them hold their value against inflation.
However, investors should be mindful and remember that the value of crypto isn’t entirely based on their supply. Other factors affect it, such as supply and demand and crypto market sentiment. Remember always to research and stay informed on any market changes when investing in crypto.