Since Bitcoin’s inception, cryptocurrencies have seen a big surge in popularity, pushing their prices to new heights. The need for alternative currencies has been expressed and welcomed by many people, who note that the value of traditional currencies can be easily manipulated by governments
What is Inflation?
While it is simple to notice the price variations of products and services, the supply and demand concept is far more complicated, as evidenced by the price fluctuations of cryptocurrencies. To live comfortably, the population requires a vast and diverse selection of things. Food, gasoline, necessities, electricity, health care, recreation, and work are examples of commodities.
Inflation is measured in a variety of ways based on the products and services under consideration, and it is the polar opposite of deflation, which occurs when the rate of inflation falls below zero, resulting in a general decrease in the price of goods and services. Monetarism is a popular theory that explains the connection between inflation and money. Monetarism is a common assumption that explains the relationship between inflation and the money supply of an economy.
Inflation is a term that describes the total effect of price changes on a wide range of products and services, and it represents the rise in the price level of goods and services in an economy over time in a unique way. When a currency loses value, it can no longer buy as many goods and services. The general population’s overall cost of living rises as a result of this loss of purchasing power, resulting in slower economic growth.
Economists agree that inflation occurs when a country’s money supply grows faster than its economic growth. To address this, a country’s responsible monetary authority, such as the central bank, may decide to take required steps to control the flow of money and credit in order to keep inflation within acceptable bounds and ensure the economy’s smooth operation.
How does it work?
Inflation is defined as an increase in the amount of money in circulation, which can be produced by a range of factors in the economy. Monetary authorities can expand the money supply by creating and distributing more money to individuals, or by lawfully depreciating (lowering the value of) money, such as by lending money in the form of credits through the banking system or by purchasing loans from banks on the financial market. Inflation can be helpful or negative for a given economy, depending on which camp is picked and how quickly the change occurs.
People with physical assets valued in foreign currencies, such as real estate or stored commodities, can expect inflation, as it raises the price of their assets and allows them to sell them at a higher price. Buyers of such assets, on the other hand, may be unhappy with inflation because they will have to pay more money to own them.
Venezuela’s currency, for example, has lost over 1,000 percent of its value versus the US dollar in less than a year. As a result of the rising rate of inflation, non-traditional investment approaches are becoming more popular. According to the most recent research reports, bitcoin use in Venezuela is increasing, with more than 20,000 companies accepting cryptocurrencies as a form of payment, including a Burger King in the capital city of Caracas. Businesses and merchants find it difficult to store government currency due to hyperinflation. As a result, bitcoin and other cryptocurrencies were regarded as far more secure modes of exchange. The monetary policy objectives of the Federal Reserve in the United States include moderate long-term interest rates, price stability, and maximum employment, all of which aim for a stable financial environment.
Price stability, or a level of inflation that is generally consistent, allows businesses to plan for the future since they know what to expect. This promotes the formation of jobs, which are defined by non-monetary criteria that change over time. As a result, the value of a currency has little bearing on the maximum employment aim, which is mostly determined by corporate values.
The Federal Reserve has publicly communicated long-term inflation targets in order to maintain a steady long-term inflation rate that is considered business-friendly. Monetary authorities are likewise taking extreme steps in challenging economic times. Following the 2008 financial crisis, the US Federal Reserve kept interest rates near zero and started a bond-buying program known as “quantitative easing.” Some opponents of the program claimed inflation in US currency would rise, but inflation peaked in 2007 and gradually declined over the next eight years. However, their policy was reviewed and it was decided to print more than a fifth of their currency during the Covid19 pandemic, making inflation inevitable.
What is the relationship between cryptocurrency and inflation?
Stock markets are a strong alternative and inflation hedge because stock prices grow dramatically during inflationary periods. In practically all modern economies, additions to the money supply are made through the financial sector in the form of bank credit injections, with much of the immediate price impact occurring on valued financial assets.
Cryptocurrencies, on the other hand, are not impacted by inflation and have grown in value and appeal as a result of their utility and inability to be manipulated. Professor Eswar Prasad of Cornell University has written extensively about currencies.
“Bitcoin price movements appear to be mainly independent of macroeconomic fundamentals, such as inflation.”
As a result, those interested in cryptocurrencies should value them for reasons other than inflation, rather than because the euro and the US dollar have lost purchasing power. There may be a link between rising cryptocurrency prices and inflation, but there isn’t enough evidence to make such statements at this time. Indeed, recognizing the worth of cryptocurrencies within blockchain technology while looking at the assets brought by these assets is more easier than looking at the economic condition to make predictions on the future price of currencies like Bitcoin or ETH. Cryptocurrencies have seen their price rise because they are valuable and cannot be attributed to luck or other external factors.
Cryptocurrency can be used as an alternative to established financial systems.
It is feasible to send money over the internet using cryptocurrency without the delays and problems that come with other payment options. A cryptocurrency is also administered by a decentralized network with a set of transparent rules, making it a viable alternative to government-controlled fiat currency. As a result, the price of cryptocurrency is solely determined by demand and does not appear to be influenced by inflation. This rise in prices is therefore justified by a value that is justified and recognized by the general public. In either inflation or deflation, cryptocurrencies have real value, and are currently unaffected by traditional economic principles. Cryptocurrencies therefore remain, for the time being, one of the few alternatives to government currencies.