Introduction: Inflation And Economics
Our globalized and homogenized economy has witnessed excessive inflation since the The Great Recession which began in 2008 and its impact cannot be overstated, but what is inflation? Inflation, by definition, is the process of sustained increasing costs over a period of time. Inflation occurs when a currency like the dollar or the Euro loses value over the course of a specific time-frame: simultaneously, goods begin to rise resulting from this economic occurrence. Inflation, over the course of the last forty years, has seen substantial debate where participants have argued its negative elements as much as its positives. Economists throughout the last century have argued that inflation occurs when the supply of money is greater than the demand of money. Inflation at a moderate rate has been argued to boost consumer demand and consumption, under the premise that higher levels of spending are crucial for economic growth and expansion. Even famous economist John Maynard Keynes argued that inflation helps prevent the Paradox of Thrift, which leads to delayed consumption. But how can inflation be a drag and negative on the economy, lets find out.
Inflation, by design, accompanied by a sustained increase in prices, leads to the erosion of purchasing power. Essentially, if a consumer does not consistently expand upon their purchasing power through the acquisition of monetary instruments, inflation can cause their purchasing power to plummet over the course of time. An increase in prices leads to a ubiquitous impact throughout all sectors of the economy: this includes the cost of doing business, borrowing money, mortgages, government bond yields and much more. If inflation has both positive and negative impacts on the traditional economy, how would this economic phenomenon affect a new digitized homogenized economy; this economic system being cryptocurrency. Inflation has resulted in negative setbacks to economic systems since the dawn of civilization, can Bitcoin and cryptocurrencies fix inflation, and how does inflation in traditional markets affect cryptocurrencies?
Bitcoin And Cryptocurrency: An Economic Savior?
It is evident that the US dollar and many fiat currencies have lost substantial value over the course of their respective time-frames, can Bitcoin and other cryptocurrencies be the answer to this economic dilemma? Bitcoin has consistently proven itself, surrounding economic valuation, to be a perfect hedge against fiat inflation “though Bitcoin has seen massive erratic downtrends, its consistent trajectory over time remains upward. Bitcoin, by design, is meant to combat inflation through two methods, its total supply will be no more than 21 million, ever throughout time and every four years, the amount of Bitcoin that can be mined is reduced by half. Investing and holding Bitcoin and other blockchain projects have been an enticing prospect for individuals who realize the detriment to purchasing power that high inflation rates can create. Resulting from inflation, the fiat in a consumers bank account consistently depreciates in value over time, whereas many cryptocurrency projects have created of deflationary measures to prevent runaway inflation: the burning of excess token supply has been one answer to this problem. Bitcoin and Ethereum has offered investors an alternative to the loss of purchasing power, but how are these cryptocurrencies less prone to runaway inflation? It is crucial to understand such a notion.
A Brief History Of Inflation: The Complexity Of Bitcoin: The Anti-Inflationary Paradigm: Decentralized Control
It has become evident over the course of history that countries have had their economies ruptured by their respective national governments. During the late 1780’s, France, under King Louis XVI, experienced rapid runaway inflation resulting from the monarchy consistently printing money to finance the American Revolution. This was a major factor on how King Louis XVI came face to face with the guillotine and Europe witnessed an entire continental upheaval from a political, economical and social standpoint resulting from the outcomes of the French Revolution. Within the 21st century, the global community has witnessed many nations that have nearly collapsed because of government manipulation of their respective economies; Venezuela and Zimbabwe are the first nations that come to mind. Bitcoin fixes this notion.
Bitcoin, by design, is non-tamperable, immutable, decentralized, trustless and free from government manipulation. Bitcoin cannot fall prey to state and federal governments adjusting interest rates or printing more money to achieve political or monetary policies. Bitcoin, like gold, is seen as a digital store of value that allows for decentralized peer-to-peer transference throughout the globe for extremely low costs. Bitcoin is an incredibly scarce commodity, by design, only 21 million will ever be created and there are almost 8 billion people on the planet in the year 2021. Scarcity, amalgamated with intrinsic value, leads to upward growth over the course of time. Simultaneously, it is easy to predict when a specific amount of Bitcoin will be minted; by the year 2140, all the Bitcoin in the world will be mined, whereas gold, although it is scarce, can consistently be found or discovered at anytime. Bitcoin’s design is a paradox by nature, amalgamating the positives of inflation and deflation. Inflation occurs because more Bitcoin is mined but resulting from the reduction of Bitcoin being mined over time, the economic instrument’s inflation rate will also decrease. However, it is incumbent to recognize that not all cryptocurrencies have the same economic paradigm as Bitcoin surrounding inflationary and deflationary design.
Stablecoins And Alts: Inflationary Impacts On Cryptocurrency
Cryptocurrency has become an ecosystem of ecosystems, perpetuating the expansion of diverse digital economic models and tokenomics that have conceived of lush and vibrant digitized economic systems, but how does inflation affect stablecoins and “alt-coins?” An increasingly popular category of cryptocurrencies, known as stablecoins, are pegged to the U.S. dollar and are incredibly useful in times of market corrections, collapses and downtrends, but how does being pegged to a fiat currency affect your investment? Since these stablecoins are pegged to fiat currencies, they’re at mercy to the inflation rates that these currencies succumb to. In essence, your investment will be directly correlated with inflation rates of traditional currencies. However, many stablecoins like USDC and DAI have created paradigms that combat this notion of inflation through economic incentives and rewards.
The design of many stablecoins have conceived of a paradigm to prevent the recurring onslaught of inflation and have sought to garner a solution to this issue by offering annual percentage yields, similarly to what banks used to offer to their clients and customers. Simultaneously, DeFi technologies have allowed for investors to lend their stablecoins for an annual interest rate for their respective loans, enabling investors to enjoy compounding interest. In Nigeria and Zimbabwe specifically, Nigerians and Zimbabweans have been turning to stablecoins for protection against inflation which has ran rampant in each country over the last ten years and it is important to reference that Nigeria’s inflation rate has become an aggregate average over the last ten years of a staggering 12%. Simultaneously, these stablecoins also enable users to send digital currency with near-zero transaction fees. Stablecoins allow for individuals who’re prone to runaway inflation in their respective nations to protect their savings through annual yielding stablecoins that are pegged to the U.S. dollar. Stablecoins, a category of “alt-coins” have created a bastion of economic trust for individuals who seek refuge from inflationary onslaught.
Altcoins such as AERGO, Cosmos, Algorand and Quant have proven during the latest downtrend that economic incentive and interest towards these cryptocurrencies are vibrant and expansive; in a time of constant downward price spirals throughout the cryptocurrency markets, these coins have not lost nearly as much of their respective all time high valuations as other cryptocurrencies and this is important to reference. Although alt-coins can be more risky when it comes to investment prospect, their economic yields that result in economic price discovery during bull-markets cannot be overstated. For many retail investors, altcoins are the driving force to wealth if invested properly and with projects that have utility and hype behind them.
Conclusion: Bitcoin And Cryptocurrencies: The Great Inflation Hedge
Currencies throughout history has succumbed and witnessed the onslaught that runaway inflation can have on nations, empires, monarchies, republics and dynasties, but today, we have a technology that specifically combats runaway inflation through a variety of methods, and that currency is Bitcoin. By design, Bitcoin aims to amalgamate the positives of inflation and deflation, preventing governments to manipulate it to pursue political or monetary policy or gain and also Bitcoin combats runaway inflation through the economic principle of scarcity. Stablecoins have also become a bastion to protect the net worth of hundreds of thousands of people throughout the world, specifically in the developing world where economic aid and preservation are needed most. It is evident that cryptocurrencies have become a hedge for investors throughout the world since its inception in 2009, one year after the grand economic collapse known as The Great Recession.
Disclaimer: Cryptocurrency investing and gambling requires substantial risk, do not invest or gamble more than you can afford to lose! I am not a financial adviser and I am not responsible for any of your trades. I am an investor of Icon Coin and the information within this article represent my own thoughts and opinions. It is incumbent that you always do your own research before investing in anything!