When the value of a currency decreases, it can lead to an increase in the price of goods and services - this is called inflation. But how is crypto impacted? Find out here ⤵️
You’ve most likely heard on the internet that Bitcoin is designed to combat inflation. But what is inflation? Inflation is the process by which the decreasing value of a currency, like the US dollar, leads to an increase in the price of goods and services over time. In other words, inflation is caused by governments printing more money than is needed, and it’s also the reason why your grandparents always talk about how things used to be cheaper.
Just recently, many experts predicted inflation to rise significantly in 2020 as governments worldwide were forced to inject trillions of dollars to help stimulate a stagnating economy caused by the coronavirus pandemic. However, inflation remained stable, hovering around 1.5% despite the pandemic-induced money printing. But now that economies are reopening and consumer spending is picking up, governments face a difficult task ahead.
Higher inflation erodes the value of the money you’ve saved and lower inflation slows the economy as a whole. For example, citizens of hyperinflationary economies like Argentina, Venezuela and Zimbabwe have to prioritize spending otherwise price levels grow rapidly and cause the money in their savings account to decrease in value.Since inflation has been a constant threat to the value stored in fiat, people often protect themselves by investing in assets that maintain their value over time.
However, after Bitcoin’s drastic 45% drop in May, many investors flocked back to gold, viewing cryptocurrency as an immature sector which hasn’t proven itself as a stable asset class nor a safe haven store of value. Any asset used as a store of value and a hedge against inflation require a high level of stability and trust. Although it no longer backs national currencies, gold has established itself in this realm throughout history.
As a result, individuals and businesses invest gold, real estate and other assets to protect themselves from future inflation. Over the last decade, Bitcoin and cryptocurrencies have shown that, like those assets, they too play a role during inflationary periods.
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