It’s no secret that the United States has undergone an unparalleled expansion of its currency supply in the early months of 2021. Even the most basic education in economics tells you that the dollar is presently at risk for devaluation. But with this much known, how does inflation affect your cryptocurrency investments?
If you’re wondering what inflation is in the first place -that’s a fair question. What inflation means can vary because any definition of it depends on the theoretical point of departure of the economist you ask. According to official claims by the US Federal Reserve, inflation is merely an increase in the price of goods and services over time. There are other schools of thought, however, that claim such a definition fails to identify the underlying cause of inflation, which is an increase in the amount of money circulating via printing activities at a central bank.
How, then, does fiat compare in contrast to cryptocurrency, and what is its relationship to inflation? To take Bitcoin as perhaps the best example, unlike fiat paper money, Bitcoin’s circulation supply is limited to 21 million units. This supply cap is inherent to the decentralized blockchain technology upon which it’s based and cannot be manipulated by a central banking agency or, for that matter, anyone else.
On the whole, the original developers and investors in Bitcoin ascribe to the theory that increased money printing leads to inflation because there is an increase in currency quantity but not services and goods in relation. The most support for this theory has been evidenced by the FOREX market where a real-life quantitative comparison can be executed.
The Mexican peso and USD pair is probably the best example of this. The Peso has historically been inexpensive to acquire with US dollars because the issuance of new currency to the Mexican supply has always outpaced that of the Dollar. Because there are far more Mexican pesos than other currencies such as the Dollar, its value has decreased.
According to the experts at SoFi, this guide to cryptocurrency on SoFi smartly argues that “the ‘why’ of crypto investing is just as important as the how.” Because there is a well-established consensus on Bitcoin, there is strong speculative demand. This coupled with a well-controlled money supply leads savvy investors to concur that cryptocurrency is one of the best assets to protect and hedge against inflation, which fundamentally addresses the “why” behind Bitcoin.
While Bitcoin is certainly not immune to recessions experienced in the wider financial market, most analysts indicate that Bitcoin is just as useful as gold as an inflationary hedge, and could even surpass the significance of precious metals to safeguarding your wealth in the 21st century. During the age of COVID, Bitcoin is being used, not unlike gold was in the 1970s, when it saw some of its best gains, to stave off a similar inflationary monetary policy.
The most dangerous aspect to inflation, history has shown, is that when it happens, it happens swiftly in a manner that’s next to impossible to manage. The IMF reported that in 2020, Venezuela saw a staggering 6500% rate of inflation due to money printing, which is why so many investors are keen on investing in Bitcoin as a means to head this kind of financial devastation off at the pass.