What is the Role of Cryptocurrency in Combating High Inflation?


Last updated on November 28th, 2023 at 06:52 pm

Word has gone around that liquid cryptocurrencies might be a replacement for the USD when inflation hits colossal numbers. However, in the short term, this might never be. This is because not every shop owner accepts BTC, ETH, or even ZRX.

On the flip side, people are gradually embracing cryptocurrency to complete payments. Currently, several popular retailers accept Bitcoin, encouraging other businesses to get digital currencies. Does this mean that inflation might claw its way and affect the crypto industry?

A point to note is that Bitcoin and ZRX trading in platforms like PrimeXBT are alternative investments to consider during inflation periods.

What Do Analysts Say?

Cryptocurrency, like all financial instruments, relates to inflation—at least when it happens to the extent it has done during COVID. Typically, people switch to less unstable assets to protect their wealth during an economic crisis.

Critically, Bitcoin prices shot up when inflation started creeping in—PrimeXBT’s trading terminal highlighted a high of over $65K in November 2021 for the asset. The behavior is a sign that the asset attracted more people at that point than at any other in history.

However, a stumbling block exists when people go deep into crypto. Its value is never consistent, meaning no one can equate the exact value of their assets that are converted to crypto. The lack of consistency means that the growth rate of the asset might not beat the increasing inflation in the long run.

Crypto in Combating High Inflation

A series of events cause high inflation and take place over a while. Issues like a disruption in the supply chain, lockdowns, and labor shortages are some main ingredients of the economic phenomenon. The Covid-inspired inflation had all these issues, with tension in Eastern Europe also a factor.

The bout of inflation sparked by Covid remains historic, but highlights that Crypto instruments have seen a jump in trading activities compared to five years ago in normal circumstances. A massive momentum in crypto prices might offset some agony caused by inflation.

As anticipated, the COVID-19 pandemic had a positive impact on crypto-market signals–evidenced by the soaring prices of most crypto instruments. During this period, many investors opted to invest in digital coins over the traditional assets eroded by the unrelenting inflation.

Impact of Bitcoin’s volatility During Inflation

Critics claim that the reason for the progressive growth of the crypto market is the gradual appreciation of cryptocurrency. For instance, despite Bitcoin’s drop in value to $30K in July 2021, it still rallied to historic highs in November, albeit its value plummeted also in May the same year.

However, the up and down swings have prompted some investors out of Bitcoin positions, describing cryptocurrency as an unstable and immature sector that is yet to prove itself as a haven store of wealth.

Compared to gold, cryptocurrencies have short-term volatility that makes them unsuitable tradable instruments for long-term purposes. Therefore, a good deal might shun the instrument to protect themselves during inflation.

What Is The Nature Of Bitcoin During Inflation?

During inflation, Bitcoin behaves like other stable assets, going by what has been happening during COVID. The fact that crypto trades normally in PrimeXBT and other platforms at times of turmoil means that it is in a way inflationary.

Bitcoin’s supply is also stable, meaning it can never behave like fiat during extraordinary economic times. Fiat currencies like the USDT or JPY can be deflationary because of the natural drop in money supply when production exceeds demand. The set limit of Bitcoin stands at 21 million, with a projection of a breach of the figure to happen somewhere in 2140.

Bottom Line—How Bitcoin Comes in During High Inflation

Bitcoin may not necessarily crash fiat currencies, but it has significantly improved the financial space globally. Its advanced technology facilitates radical growth in DeFi. Inflation is an intricate economic concept that can be catastrophic if it spins out of control.

As a result, investors invest in real estate and gold to minimize the effects of future inflation. Cryptocurrency has a significant role to play, and COVID has highlighted an ounce of it. The future will reveal more.

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