What is Inflation?
In economics, inflation is the cumulative rise in the cost of goods and services across a nation. Each unit of the nation's currency can purchase fewer goods and services as the general price level rises, hence inflation is characterized by a decline in the currency's purchasing power. In a nutshell, Inflation is defined as the rate at which prices for goods and services rise. Every good or service is impacted by inflation, including utilities and basic amenities like food, health care, and shelter. Because inflation effectively devalues currency, it has an impact on both corporations and individual customers. The loss of purchasing power of a currency impacts the cost of living for those who use that currency, which has a detrimental impact on the country's economy.
Causes of Inflation
One of the significant causes of inflation is the increase in the supply of a currency. Governments and central banks tend to manipulate interest rates in order to quickly increase the circulating supply of the country’s currency, which is a fundamental issue with FIAT currencies. As a result, markets are often temporarily flooded with liquidity, but the increased supply diminishes the purchasing power of that currency.
Other causes include:
- Trade Unions
- Exports
- Tax Reduction
- Price-rise in Foreign Markets
- Hoarding
- Increase in Public Spending
- Population Growth
- Government Spending Deficit
Cryptocurrency: The solution to inflation?
Cryptocurrency is the proposed solution to inflation, inflation is one of the reasons cryptocurrency was developed. Unlike a FIAT currency, cryptocurrency doesn't react to inflationary forces. Cryptocurrency has a hard-capped supply that does not exceed after creation and more cryptocurrency can’t be injected into circulation discreetly like our traditional FIAT currency. Cryptocurrency cannot be as easily manipulated as fiat by altering interest rates and expanding the amount of FIAT money. There will never be more than 21 million bitcoins created, Bitcoin is a desirable inflation-resistant store of value.
In addition to having a supply limit of 21 million, Bitcoin is also subject to a mining halving. After every 210,000 blocks of transactions, the Bitcoin blockchain network lowers the rewards given to miners. A bitcoin block is created on average every 10 minutes, and 210,000 blocks will be created in around 4 years, further increasing the scarcity of bitcoins. Following the law of demand and supply in economics, the higher the demand for bitcoin and the lower the supply allow bitcoin to hold its value higher over time, thereby reducing inflation. Bitcoin popularity is increasing every day as people perceive bitcoin and other cryptocurrencies as a solution to inflation, as well as for its transaction transparency, decentralization, and immutability.
Bitcoin, like gold, does not belong to any entity, economy, or currency. It is a worldwide asset that reflects global demand. Bitcoin is a better investment than stocks because it eliminates many of the economic and political risks associated with stock markets, which drive inflation in these financial assets. Bitcoin is simple to exchange, rare, transparent, and safe. Bitcoin outperforms gold as a financial asset because it is more portable, decentralized, and transferable. People saw Bitcoin as a replacement for FIAT money because inflation already had half the US dollar value during the previous five decades. However, after reaching an all-time high of almost $69,000 in November 2021, bitcoin's price began to fall massively. Around the same time, USD purchasing power grew relative to BTC. The purchasing power of the US dollar relative to Bitcoin has been increasing for the majority of this year. The narrative of bitcoin as an inflation hedge was jeopardized due to this enormous downtrend of bitcoin value. Investors, particularly those who are new to cryptocurrencies, find it difficult to invest in bitcoin due to ongoing concerns about market volatility and cryptocurrency market sentiments in general.
Can Cryptocurrencies be Inflated?
From a technical perspective, some cryptocurrencies can be inflated. Yes, bitcoin supply is hard-capped and there can never be more than 21 million bitcoin ever. Bitcoin miners gain bitcoins as a reward for validating blocks of transactions, these bitcoins (rewards) are generated and injected into the total supply of bitcoin. But these rewards (bitcoins) miners gained for validating bitcoin transactions are halved every 4 years, thereby the inflation rate reduces every 4 years. Inflation can also affect stable cryptocurrencies like USDT, BUSD, and USDC that are pegged to FIAT currencies. These stable cryptocurrency values equate to the currency they are pegged to. The stablecoins pegged to a FIAT currency also experience inflation when the FIAT currency experiences inflation. In literal terms, when the USD is inflated, USDT, BUSD, USDC, and all other stablecoins that are pegged to the USD are inflated as well.
Cryptocurrency Downsides
Cryptocurrency can be a hedge against inflation that destroys economies; cryptocurrency can be the future of money, but it has drawbacks for the time being. The major downside of cryptocurrency is volatility, which is the fluctuation of an asset's price. This volatility is caused by big investors (whales) that control a large percentage of the cryptocurrency market and their tendency to move the market when they withdraw their liquidity by converting cryptocurrency to FIAT currency. This volatility is also impacted by news and regulations from governments and the volatility of FIAT currencies. If cryptocurrency adoption rises, the volatility impact of big investors (whales) will diminish, lowering volatility. Furthermore, if cryptocurrency adoption increases there will be no need to convert cryptocurrencies to FIAT because cryptocurrency will be accepted as legal tender and used for daily transactions.
The Bottom Line
Inflation has been the major problem in our traditional FIAT currency, inflation reduces the purchasing power of FIAT currencies. Every good or service is impacted by inflation, including utilities and basic amenities like food, health care, and shelter. Because inflation effectively devalues currency, it has an impact on both corporations and individual customers. Inflation has a detrimental impact on the country's economy. Cryptocurrency has the potential to solve the problem of inflation, in addition to being transparent, secure, and decentralized nature of cryptocurrency, cryptocurrency supply is also hard-capped. Cryptocurrencies can’t be injected into supply exceeding its total hard-capped supply like FIAT currencies. Bitcoin for instance can never exceed 21 million, and more demand for bitcoin due to utility increases the price of bitcoin. The major downside with this proposed solution is volatility and volatility if cryptocurrency can be solved by adoption and acceptance to be a major global legal tender.
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