Cryptocurrency and Inflation: Everything You Need to Know

In this article, you will learn the basics of inflation, the role of cryptocurrencies in inflation, and how you can use USD-backed stablecoins like BUSD. do protection.

TL; DR

  • Inflation is defined as the process of decreasing the value of a currency, such as the US dollar, resulting in an increase in the price of goods and services over time.

  • In this article, you will learn the basics of inflation, the role cryptocurrencies play in inflation, and how you can use USD-backed stablecoins like BUSD as a commodity. stable hedge against inflation.

Chances are you’ve heard on the internet that Bitcoin is designed to fight inflation. But what is inflation? Inflation is the process of decreasing the value of a currency, like the US dollar, leading to an increase in the price of goods and services over time. In other words, inflation is caused by the government printing more money than necessary, and that’s also why grandparents always talk about how things used to be cheaper.

More recently, many experts have predicted a significant increase in inflation in 2020 as governments around the world are forced to inject trillions of dollars to help stimulate economies stalled by the coronavirus pandemic. However, inflation remained stable, hovering around 1.5% despite the money printing caused by the pandemic. But now that economies are reopening and consumer spending is picking up, governments face a daunting task ahead.

Is inflation good or bad for an economy?

For renowned economist John Maynard Keynes, inflation is not a terrible thing in some situations, and can actually boost the economy and create new jobs during shutdowns. Overall, a low inflation rate stimulates spending, investment, and borrowing — all necessary for healthy economic growth. On the other hand, when inflation gets out of control, it will lead to hyperinflation, causing the prices of goods and services to increase rapidly while wages stagnate, the purchasing power of money decreases and the cost of living becomes increasingly expensive. .

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Higher inflation erodes the value of the money you have saved, and lower inflation slows down the economy as a whole. For example, citizens of hyperinflationary economies such as Argentina, Venezuela and Zimbabwe must prioritize spending or else prices will rise rapidly and cause the money in their savings accounts to depreciate.

Cryptocurrencies and Bitcoin’s Role in Inflation

Since inflation is a constant threat to value stored in fiat, people often protect themselves by investing in assets that maintain their value over time. Historically, gold has been used as a hedge against inflation, but now cryptocurrencies have become a more popular alternative in recent years.

Hedging against inflation risk

Bitcoin is essentially a deflationary asset, which is why citizens of countries with volatile fiat currencies are increasingly using it as a store of value to protect against hyperinflation. production and the rising cost of goods and services on a daily basis. Unlike fiat, cryptocurrencies cannot be manipulated to the same extent by changing interest rates and increasing money printing. Most importantly, Bitcoin’s supply will never exceed 21 million, which makes it an attractive store of value that is resistant to inflation. Although Bitcoin has grown in popularity over the past year, the volatile nature of the crypto market continues to be a polarizing topic.

Suspicious volatility of the cryptocurrency market

Critics argue that the main reason for the increase in the amount of institutional money in the crypto market is the overall increase in the price of cryptocurrencies over time. For example, despite a sharp drop from recent all-time highs to around $30,000 in July, Bitcoin still up 2% for the year. In August, the annual increase increased to 300%.

However, after Bitcoin plummeted 45% in May, many investors turned back to gold, seeing crypto as an immature sector that has yet to prove itself as a stable asset class as well. as not a safe store of value. Any asset used as a store of value and a hedge against inflation requires a high degree of stability and trust. Although no longer backing national currencies, gold has asserted its position in the field throughout history. Meanwhile, cryptocurrencies have too much short-term volatility to give investors confidence in gold like them.

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Replace Stablecoins

Cryptocurrencies often experience sudden price fluctuations that, for many, make them a less attractive store of value. While a 30% price drop within 24-48 hours is considered rare and pathetic in traditional markets like stocks, these are relatively common events in the cryptocurrency market. If you are hesitant about the volatile nature of cryptocurrencies, you may consider using stablecoins like BUSD, a secure and 1:1 compliant USD-backed stablecoin issued by Paxos and approved by the New York State Department of Financial Services (NYDFS). Here are the different ways stablecoins benefit users in hyperinflationary countries:

Convenient transaction

Trading forex and various fiat currencies is a popular method to combat inflation, and stablecoins provide you with a more convenient way to participate in the market. Unlike the traditional money market, stablecoins can be purchased 1:1 with USD via bank transfer, and if you have KYC verified, fund your Binance cash wallet with the currencies. other and then convert to BUSD. You can also convert and get other stablecoins like USDT, USDC, TUSD with no fees. To reduce risk, always use stablecoins backed 1:1 in USD.

Daily transactions

Citizens of hyperinflationary economies often have to deal with a volatile fiat currency. Stablecoins are a great alternative as more and more merchants and stores are starting to accept cryptocurrency as a form of payment. In fact, fiat-backed stablecoins like BUSD are becoming increasingly popular in volatile economic markets.

Key point

Inflation is a complex economic concept that can be good or bad, but the common belief is that it is catastrophic when it becomes too high and out of control. While inflation remained steady last year as the coronavirus pandemic held businesses back, it is expected to rise in the near future as spending increases and the economy opens up.

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As a result, individuals and businesses invest in gold, real estate, and other assets to protect themselves from future inflation. Over the past decade, Bitcoin and cryptocurrencies have shown that, like those assets, they also play a role in times of inflation.

Start your crypto journey with Binance

Start by signing up Binance.com account or download Binance Cryptocurrency Trading App. Before you start your crypto journey, verify your account to increase your crypto purchase limit. Once verified, you can buy BUSD on Binance with cash via bank transfer, card channels or e-wallet options.

Disclaimer: Cryptocurrency investments have high market risk. Binance is not responsible for any loss in your trading. The opinions and statements given above should not be considered financial advice.

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