Nov 14, 2022

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Why is cryptocurrency the best protection against inflation

Cryptocurrency has been designed to solve problems of traditional banking systems, and inflation is probably the main one. Let’s examine how inflation affects fiat money, why crypto can resist this process, and what the best hedge against inflation is.

Inflation problem

Inflation is when the purchasing power of a certain currency goes down. It boils down to the rising prices of goods and services. People need more money to purchase items, and the government prints more and more currency. As a result, the monetary system inflates like a bubble.

In any fiat-based economy, inflation is an inevitable thing. That’s why both investors and regular depositors have been looking for a tool that works as a hedge. Precious metals, stocks and real estate have been serving this purpose for centuries, but their capacity isn’t limitless.

Here comes crypto

Over the past years, many investors have come to the conclusion that cryptocurrency can protect against inflation. The two main arguments for this are limited supply — you cannot mint more Bitcoins than it’s designed and decentralization.

As yet, crypto has not proven to be a more or less effective inflation hedge tool than stocks, gold or real estate. But at least, it can generate its owner additional income amidst the rising cost of living.

Immunity against inflation?

It is logical to assume that if cryptocurrency is not fiat currency, it doesn’t respond to inflationary pressures like traditional money does. That seems plausible but hard to prove, as the world’s major economies experienced little inflation for the last decades.

However, the 2021/2022 period is the first time when investors have traded cryptocurrency during consumer price surges. And this is a good sign for crypto.

Pros of crypto

As we have already mentioned, the two main advantages of crypto among other financial assets are limited circulation and decentralization.

Almost any popular digital currency has its pre-set limits, meaning it cannot be minted more than a certain amount at a certain period of time. For example, Bitcoin’s annual rate of mining dips by 50% every four years. This creates useful scarcity and brings more value.

Decentralized structure of cryptocurrencies makes them immune to such factors as usurpation of power and bribes. There is no leader, and all the crucial decisions are taken by a community that really cares.

Instead of conclusions

In the near future, crypto can prove to be a good tool against inflation because it has the trust of many investors and communities, while central banks don’t have it. The value of crypto may increase, as people tend to seek out a better store of value when their local currency inflates.

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