The Battle of Crypto vs Inflation: Who Will Win?
Inflation is the gradual devaluation of money caused by an increase in the printing and circulation of fiat money. In other words, it’s a condition where each unit of currency buys fewer goods and services over time, effectively causing prices to rise. It’s an unfortunate byproduct of modern monetary systems that have fiat currencies, like the US dollar, as their primary asset, which central banks can manipulate to alter monetary policy in any given economy. An example of this would be when central banks change interest rates or buy government bonds from banks, which increases the money supply and leads to inflationary pressures on the economy.
Bitcoin, a Solution Based on Trust
Bitcoin and similar cryptocurrencies are a solution based on trust. Blockchain-based technologies give people around the world a new way to save, invest, and transact with confidence in an economy that’s plagued by runaway inflation. People who don’t trust their government will have little incentive to keep their wealth in fiat currency like USD when they know its value is constantly decreasing. Inflation presents an opportunity to boost the BTC market but only if people trust it. Cryptocurrencies can help protect capital from inflation by making saving money in digital assets safer than putting all your eggs in a government ruled basket. But crypto can only be a secure alternative if the community is behind it. The recent fall in BTC’s price is sufficient proof of how key endorsement can be. This crypto sell-off was born out of collective anxiety surrounding inflation and the increase in prices, which made investors shift from crypto to more traditional assets.
Stablecoins and their Role During an Inflation Period
During this time of economic uncertainty, some stablecoins, like TerraUSD, lost their 1:1 peg to the dollar. That was not the case with USDT. Tether has kept its peg to USD during unstable inflation times, a feat no other stablecoin has managed to replicate. Despite new stablecoins coming into existence and fiat-pegged coins being touted as solutions for stability, Tether has held its value because it’s backed by billions of USD in assets. Now that more investors are trusting these types of cryptocurrencies as legitimate stores of value, they’re becoming an integral part of an inflation-proof portfolio.
No Easy Answers
It is not clear if crypto is going to be able to solve inflation. Cryptocurrencies with a fixed supply should theoretically help mitigate instability, but whether or not they can solve it is another story. The truth is that, during the time of economic uncertainty, the bulk of digital assets were sold in a panic giving crypto cero chance to prove its potential. That being said, it’s no surprise that when doubts fade, cryptocurrency goes back to being popular among investors, both new and experienced. The meteoric rise in value has been great for crypto, but it still doesn’t make it a safe investment. Crypto offers uncorrelated returns, meaning crypto won’t necessarily move in tandem with other assets like stocks or bonds. Although crypto makes a portfolio more resilient to inflation, some unique risks are associated with crypto.