Is Crypto A Safe Haven against Inflation?

Foreword

One of the reasons cryptocurrencies are so attractive to investors is that they are relatively more resistant to inflation than fiat currencies such as the US Dollar. Today, many economists believe that a certain level of inflation is good for the economy, so the US government has been excessively printing cash in recent decades, causing the amount of dollars in circulation to far exceed the actual demand, which is why a can of soda only cost a nickle 50 years ago but now it costs two bucks.

What is Bitcoin's Role in Inflation?

Cryptocurrencies, such as Bitcoin, tend to appreciate much faster than USD depreciates. In 2010, Bitcoin was almost worthless and not many people were interested in it. In April 2022, although Bitcoin has passed its peak, its value is still close to $40,000. The cryptocurrency market is volatile, so even though Bitcoin and other coins have experienced dramatic ups and downs, their value still rises over time. As a result, cryptocurrencies — and Bitcoin in particular — have become one of the increasingly popular investments for fighting fiat currency inflation.

Why is Bitcoin Inflation-Resistant?

Bitcoin is known to be inflation-resistant because it has a limited supply, much like gas and oil, the non-renewable resources, and as more and more bitcoins are mined, the unmined will only be fewer and fewer — there are only 21 million bitcoins in total, and every four years, the number of bitcoins mined is halved.

The value a fiat currency stores will be slashed by inflation, so people use various investments to keep the value of assets from depreciating over time. Gold has traditionally been seen as the most effective tool against inflation, but today cryptocurrencies seem to be trending more than gold.

Unlike fiat currencies, cryptocurrencies cannot be adjusted by changing interest rates and overissues. What's more, bitcoin has a limited supply as mentioned above, so it has a strong appeal to those looking to maintain value. Of course, while bitcoin has exploded in popularity over the past two years, it remains highly polarized given its wild volatility in the market.

Is Stablecoin A New Option?

Unforeseen price movements in crypto may seem fatal to many. In traditional stock markets, a 30% drop in price within 24-48 hours is usually considered a rare and catastrophic incident, but it happens every now and then in the crypto market. Therefore, stablecoins such as BUSD have become a new choice for investors who are price sensitive. BUSD is a legal stablecoin issued by Paxos and approved by the New York State Department of Financial Services, which is 1:1 exchangeable with the US dollar.

Conclusion

Inflation is a complex economic concept with pros and cons. It is widely believed that if inflation gets too high and spirals out of control, it will have catastrophic consequences for an economy. The Covid pandemic has caused global companies to shut down operations, so the global inflation rate has been relatively moderate. However, as people recover from the lockdown, and the economy gradually opens up, it is foreseeable that the inflation rate will rise in the near future.

Some people choose to invest in gold, real estate and other assets to protect themselves from inflation, but in recent years we can find that cryptocurrencies also play their own unique role in inflation, just like the above assets.