The Link Between Cryptocurrency and Inflation
For many people, especially investors, inflation can result in serious economic problems. Inflation has been an even bigger issue in recent years. In the United States, the inflation rate increased to 8.5% as a result of the COVID-19 epidemic. Inflation has various reasons, and it can affect currencies everywhere in the world. But the connection between cryptocurrencies and inflation is still up for debate.
Many enthusiasts of cryptocurrencies assert that they are resistant to inflation. With my in-depth understanding of cryptocurrencies, I sought a definitive response. Do cryptocurrencies lose value due to inflation? I looked at a number of actual reasons for or against it. In this post, I will explain you the link between cryptocurrency and inflation.
What is Inflation?
When the price of goods and services rises over time due to the declining value of a currency, such as the US dollar, the economy is said to be experiencing inflation. But they said that, unlike fiat money, cryptocurrencies couldn’t be as easily influenced by shifting interest rates.
Early in May, on hearing that the FED was raising interest rates, both bitcoin (BTC) and ether (ETH) rose, gaining by roughly 3.5% and 1.2%, respectively. One factor contributing to significant losses in the cryptocurrency markets is rising inflation. The United States Federal Reserve announced the largest rate increase in the previous 20 years — a 0.5% increase in interest rates.
After hearing about the interest rate increase, cryptocurrencies experienced brief price increases, although such increases were short-lived.
But many analysts continue to think that cryptocurrency has been acting like a large tech stock, similar to how stocks have been acting previously.
Your savings lose value when inflation rises, and as inflation declines, the economy as a whole grows more slowly. For instance, those living in hyperinflationary countries like Argentina, Venezuela, and Zimbabwe must prioritize spending to prevent their savings from losing value as prices rise quickly.
Cryptocurrency Role During Inflation:
People frequently take measures to safeguard themselves by investing in assets that hold their value over time since inflation has been a persistent threat to the value stored in money. Historically, gold has been regarded as a hedge against inflation, but in recent years, cryptocurrencies have gained in popularity as an alternative.
While the value of the US dollar has decreased, that of Bitcoin has increased significantly, rewarding early investors. However, the value of cryptocurrencies fluctuates greatly. Recent investors who lost money when the price of bitcoin crashed may tell you that their money has not outperformed inflation in the near run.
In recent years, bitcoin has closely mirrored the performance of the American stock market, which thrives when the economy is stimulated and falters when spending declines, such as during periods of high inflation. In December 2021, when inflation hit 40-year highs, Bitcoin decreased. Without the advantage of hindsight, it is challenging to determine whether Bitcoin is a long-term inflation hedge.
But not all cryptocurrencies function the same way as bitcoin. Some cryptocurrencies are deflationary, which means that their supply shrinks over time in an effort to gradually raise their value (if the demand remained the same).
The Stablecoin Alternative:
Because of their frequent and abrupt price changes, many people find cryptocurrencies to be unattractive stores of value. In traditional markets like equities, a 30% decline in price over a 24- to 48-hour period is rare and terrible, yet these occurrences are very typical in the cryptocurrency market. Consider adopting secured, fiat-backed stablecoins like BUSD, a 1:1 safe and compliant USD-backed stablecoin produced by Paxos and authorized by the New York State Department of Financial Services, if you’re wary of the volatility nature of cryptocurrencies (NYDFS). Here are several ways stablecoin users in countries with high inflation can benefit:
Convenient trading:
A well-liked strategy to fight inflation is trading Forex and various fiat currencies, and stablecoins give you an even more practical option to engage in the market. Stablecoins can be acquired 1:1 with USD by wire transfer, and after your KYC status has been validated, you can top up your Binance cash wallet with additional currencies before converting it to BUSD. This is in contrast to typical currency markets. Other stablecoins like USDT, USDC, and TUSD can also be converted and received without any costs. Always utilize stablecoins that are backed 1:1 by USD to lower risk.
Day-to-day transactions:
Fiat currencies are frequently unstable, which affects residents of economies that experience hyperinflation. Given that more shops and businesses are beginning to accept cryptocurrency as payment, stablecoins are a fantastic alternative. In fact, insecure financial markets are favoring fiat-backed stablecoins like BUSD more and more.
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