Amidst rising inflationary pressure, investors are intensifying their efforts to safeguard their assets. With traditional financial investments proving to be inadequate in the battle against inflation, investors are urgently seeking a new solution. Cryptocurrencies, the trending digital assets, have emerged as the hope for investors. Now, investors are pinning their hopes on the potential of cryptocurrency to act as a hedge against inflation.
Do Cryptocurrencies Experience Inflation?
While cryptocurrencies can undergo inflation, their inflation rates vary because each cryptocurrency has its own unique monetary policies. For instance, Stablecoins are a type of cryptocurrency whose value is pegged to fiat money. In case of inflation, this type of cryptocurrency will suffer the most as it is directly linked to the fiat currency.
Cryptocurrencies can be divided into inflationary and deflationary. If the number of coins increases over time, it signifies the cryptocurrency is inflationary. With the increase in supply through mining or staking, the value of an individual coin will decrease.
If the supply of coins decreases over time, it means the cryptocurrency is deflationary. Through burning coins, the number of coins in circulation is reduced, resulting in the rise of the price of individual coins.
How Does Inflation Affect Cryptocurrency?
There are many ways in which inflation can affect cryptocurrencies, including influencing investor sentiment and the cost of cryptocurrency mining. In situations where the inflation rate is high, some investors opt to sell their cryptocurrency holdings to avoid any risks. Additionally, inflation can also increase the expenses associated with mining cryptocurrency, consequently affecting the price of various coins.
Why Is Cryptocurrency Used To Hedge Against Inflation?
Due to their decentralized nature and fixed supply, cryptocurrencies are viewed as a potential hedge against inflation. All cryptocurrencies except stable coins have an upper limit. Since the inception of smart contracts for cryptocurrencies, the upper limits have been predetermined and encoded within them, ensuring that they cannot be altered by any party.
How Can Cryptocurrencies Act as a Hedge Against Inflation?
Cryptocurrencies function similarly to traditional money but only exist in digital form. They operate independently of any government or bank, utilizing blockchain technology to eliminate the need for a centralized authority. Every transaction is recorded in a public ledger and is accessible to anyone on the blockchain. The key reasons cryptocurrencies can serve as a hedge against inflation is due to their decentralized nature, limited supply, and ease of transfer.
What Happens When the US Inflation Rate Reaches Higher Levels?
- Investment From Institutions: At times like inflation, large-scale institutions may consider investing in cryptocurrencies like Bitcoin. Given that Bitcoin is considered a store of value, the institution’s interest in it tends to rise with higher inflation rates.
- Increase in Demand: Whenever the inflation rate is high, it often leads to an increase in demand for alternative investments like cryptocurrencies. This is especially true for Bitcoin, which is synonymous with stability and widespread adoption.
- Market Sentiment: If investors believe that crypto can be a viable alternative investment during inflation, it can elevate the demand for cryptocurrencies and drive prices.
- Speculative Craze: During high inflation, the stock market tends to decline, leading speculative traders and investors to shift their focus toward cryptocurrencies. These individuals may see crypto as a quick way to make profits while offering a hedge against inflation.
Is Bitcoin inflationary or deflationary?
Contrary to certain claims regarding Bitcoin’s status, it is indeed inflationary. Bitcoin’s supply gradually increases over time, and every four years, its supply rate decreases by half until it reaches the hard cap of 21 million coins.
Is Bitcoin Immune to Inflation?
Although Bitcoin isn’t immune to inflation, it’s better to say it is quite resistant to inflation. As the largest cryptocurrency by market capitalization and the most widespread currency, Bitcoin can be considered a safe haven. The reasons that make Bitcoin stand against inflation include,
- Smooth Transfer of Assets: Bitcoin is decentralized, portable, and accessible, allowing anyone to store and transfer assets. It also boasts interchangeability, security, and scarcity.
- Limited Supply: The limited supply, which is 21 million, makes it a favorable asset to hedge against inflation.
- Not Based on Specific Entity: Bitcoin’s independence from any single currency, economy, or entity and its status as an international asset class reduces the risk of inflation.
Risks of Investing in Cryptocurrency
Before investing in crypto, there are certain things you need to be aware of, and they are:
- Security Issues: The peculiar nature of the crypto industry makes it a hot spot for scamming and phishing activities. Therefore, a thorough analysis should be conducted before investing in crypto and prioritizing safety.
- Volatility: Cryptocurrencies are well known for their volatility, often experiencing rapid and significant price movements within a short time frame. So, it’s best to keep your emotions in check and be prepared for swift price fluctuations.
- Regulatory Uncertainty: The regulations in crypto are still in the nascent stages as various governments around the world are having a hard time deciding how to regulate crypto. Moreover, regulatory measures can influence crypto adoption, thereby affecting their effectiveness in combating inflation.
Conclusion
The clash between inflation and investment portfolios will result in the loss of assets for investors. Hence, investors are seeking cryptocurrencies to act as a hedge against inflation and safeguard their assets. The unique features of cryptocurrencies make it a perfect investment vehicle during periods of high inflation.
