Inflation has always been a persistent danger to the value stored in fiat currency. For decades, people have preferred to invest in gold as a hedge against inflation, but in recent years, cryptocurrencies have turned into a viable option as well.
The contradicting fact is that, as much as crypto exploded in popularity last year, it is facing a brutal crypto winter coupled with the abrupt collapse of prominent crypto firms. Cryptocurrencies have been perceived to help struggling economies beat inflation. However, the crypto market condition at present tells otherwise.
Some experts even believe that the slumping price of cryptocurrencies is allegedly due to inflation, but nobody has a reasonable explanation to support the claim. Here in this article, we will present to you all the real arguments associated with whether inflation impacts crypto or not.
Understanding Inflation
From a general perspective, “inflation” is the increase in the cost of goods and services across an economy. Inflation, when it occurs, affects currency, making it lose its purchasing power.
Furthermore, some of the things that initiate inflation are;
- High production costs
- Natural disasters
- A high unemployment rate
- high consumer demand, and company policy
Keeping these factors in mind, you must know that inflation in a country doesn’t have a direct impact on cryptocurrency. Even some crypto experts argue that inflation creates favorable conditions for digital assets. The reason is that when fiat currency begins losing value, many people consider investing in crypto to store value.
The sudden collapse of FTX has changed the whole perspective on the subject. The crash of FTX’s FTT token is a live example of how inflation impacts crypto. It all started when the largest exchange by trading volume, Binance, announced that it would liquidate FTT tokens as part of its exit from FTX equity. Binance took the decision in light of recent events that have given FTX a bad reputation.
This resulted in a massive dump of FTT tokens, and the community began to panic, expecting another Terra Luna situation. These massive withdrawals have undoubtedly resulted in the bankruptcy of a slew of crypto firms with significant exposure to FTT tokens, which when crashed, caused inflation.
Cryptocurrency and Inflation: Is There a Relationship?
Inflation is directly related to fiat currency but has little to no impact on crypto. However, inflation has many times found a way to interact with the crypto market, but we can never be so sure. Although some experts consider cryptocurrencies “digital gold” because you can buy them with real money, this is still not enough proof.
However, given that cryptocurrencies are still in their infancy, it may be premature to conclude that they are related to inflation. As a result, there isn’t any solid proof to back up the assertion that cryptocurrency and inflation are interrelated. In addition, there is no logical argument to show that using bitcoin as an inflation hedge is a sound strategy.
The suspicion of a crypto inflation relationship comes from the crypto general price performance in 2022, which is not at its best. The rate at which bitcoin’s price fell to $18,000 in the final week of September and then further to $16,000 in November is alarming. And it has not left this price range, as it only adds a few bucks, then subtracts the bucks and starts recovering all over again.
Bitcoin at its core is deflationary. However, looking at the market condition, doubts arise that something is keeping Bitcoin from recovering from this setback after months of staggering price movements.
It all goes down to demand and supply, as bitcoin is deflationary. Nevertheless, currently, amid crypto winter bitcoin’s demand is way lower than back in the second half of 2020. This has created interim inflation of it on the market.
Although crypto holders who trade are surviving the storm in the crypto space by using top trading tools like the-crypto-profit-pro, it is skeptical if inflation is to blame for crypto’s poor state.
Is Cryptocurrency an Anti-Inflationary Asset?
Crypto experts contend that crypto coins are a form of anti-inflationary asset. The original belief was that cryptocurrency appreciates when the value of fiat currency declines.
This is because when a local currency increases in value, people typically search for a better store of value. And crypto has always been a great alternative for maintaining their purchasing power as the dollar declines. Crypto investors convert their current assets to cryptocurrencies to avoid inflation and preserve the purchasing power of their currency.
From this horizon, we can conclude that the cryptocurrency market may even benefit from inflation-related insecurities. So does this infer that cryptocurrencies do not experience inflation?
Do Cryptocurrencies Experience Inflation?
Inflation for cryptocurrencies is a possibility, even though there haven’t been any verified facts to support these claims. Initially, after the launch of cryptocurrencies, the world was hesitant to accept this type of currency.
And in response, the crypto space continued to evolve its operation to be straightforward, transparent, and familiar with the financial system people are used to. Think of stablecoins, a subset of cryptocurrencies that operate on different monetary systems and seek to have their value linked to fiat money.
Stablecoins are not facing the price pressure many crypto coins are presently based on, but the moment anything goes wrong with the economy, it affects stablecoins. This is because inflation affecting fiat currencies, to which stablecoins are pegged, impacts it.
Now, since stablecoins are regarded as crypto, inflation having an impact on cryptocurrency is defended and can be said to be true. But you can always state the coins that could be affected to give clear information about crypto and inflation.
Conclusion
In general, inflation tends to reduce the value of currencies, but cryptocurrency is not a form of money, but stablecoins are. The implication is that certain cryptocurrencies have no direct relationship with inflation. While some experts believe that inflation is the reason why cryptocurrencies are losing value, others believe that inflation helps cryptocurrencies appreciate.
Returns on bitcoin have risen in line with the leading stock market indices just this year. This implies that bitcoin’s price typically falls in tandem with market downturns. But until there are strong supporting arguments to support this claim, it may not be accurate to say that inflation is a factor in the poor performance of cryptocurrencies.
