WHAT IS INFLATION?
Inflation is the process by which a currency like the dollar or euro loses value over time, causing the price of goods to rise. Bitcoin (and some other cryptocurrencies) are designed to experience predictable and low rates of inflation.
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.
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 CONNECTION BETWEN CRYPTO AND INFLATION
Many fans of cryptocurrency often think of it as a digital substitute for the US dollar, and in some ways, it is.
Not every coffee shop is accepting Bitcoin or Ethereum, but crypto is growing as a method of payment. Several big-name retailers (and popular e-tailers) already accept bitcoin, and it’s quite possible the number of businesses accepting digital currencies is only going to grow.
If inflation erodes the value of a dollar over time, people often look for assets that can consistently outgrow the increase of inflation. Crypto’s big moves in a year like 2021 had some people feeling digital assets could serve that purpose. A lot of investors already do this with gold, commodities and other investment asset classes. Instead of putting money in traditional and alternative investments to build and store wealth, an investor might purchase cryptocurrency in hopes it increases in value — making it less vulnerable to the fluctuations of the U.S. dollar.
What we’ve learned over the past few months is that big swings in crypto mean it lacks the consistency needed to outpace inflation. For instance, Bitcoin’s value significantly decreased in 2021 at the same time consumer prices began heating up — and it saw another decrease at the end of 2021 that’s continued into 2022.
This also signals Bitcoin is so far unreliable when it comes to being an everyday currency. When the value of a digital coin swings 10% one direction or the other in a matter of days, it’s hard to see it as trustworthy tender for the average person to use it to make purchases. This volatility means it remains risky not only as a currency, but as an investment asset class, too.
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