Approach to Inflation Protection: Most economically savvy people have heard of inflation. Commonly used in a negative light, everyone knows that it lowers a currency’s purchasing power. But what exactly is inflation, and how can cryptocurrency protect itself from it? To help shed light on the causes of inflation and the role that digital assets play in this complex financial phenomenon, BeInCrypto has compiled a helpful guide.
What is Inflation?
The basic definition of inflation is the general trend toward higher prices across the board as a result of a decline in the purchasing power of a currency. There are three distinct forms of inflation, but they all result in a slow but steady price increase. Three distinct forms of inflation are demand-pull, cost-push, and built-in. Now, we’ll examine each one.
Demand-Pull Inflation
The money supply becomes out of whack with the demand for goods and services in this form of inflation. Simply put, it happens when a country’s demand for goods outstrips the supply of such goods, either through imports or domestic production. Because of this, the price of these things will go up, reducing the purchasing power of consumers’ money. When governments produce money at a rate higher than their economic demand, the opposite happens, and the consequence is the same. The purchasing power of currency is further diminished due to an increase in the money supply that an increase has not matched in production.
Cost-Push Inflation
Here, we observe price increases due to a rise in the commodity’s fundamental cost. For whatever reason, let’s pretend that lumber prices go up. Companies would likely pass the loss cost on to customers through higher prices for lumber-based products since they cannot absorb the loss themselves. One unit of currency is now worth less than it was before.
However, unless the underlying commodity is oil, this form of inflation is not likely to affect the entire economy simultaneously. Since a rise in the price of oil results in an increase in the cost of fuel, which impacts the price of nearly every commodity that can be shipped, a rise in oil prices has a multiplicative effect on the cost of most goods.
Built-In Inflation
In this scenario, a country prepares for inflation by increasing wages and productivity to offset it. If this works, we can strike a basic equilibrium that maintains a relatively constant quality of living for most people. A wage-price spiral, however, can happen if things get a little out of hand. Approach to Inflation Protection: As a result of having more disposable money, consumers can buy more goods and services after a pay raise.
Also, when companies raise wages, consumers pay more for goods and services, eventually increases. Hyperinflation, in which the purchasing value of a currency decreases by 50% or more in a single month, might result if this is not controlled. Inflation in Venezuela has increased by 53,798,500% from 2016 to 2019, providing a clear and recent example of this.
Everything Sounds Bad—Can Cryptocurrency Help?
When controlled properly, inflation need not be negative. However, many governments fail to strike the right balance for various reasons. Numerous investment vehicles, including equities, precious metals, and others, are available to citizens to protect against this. In most cases, their value remains stable regardless of fluctuations in the value of a particular currency. After that, investors have two options: either wait for the currency to settle or, more commonly, convert their wealth to a different currency.
The bitcoin market may take off here. Although there is no uniform rule for digital assets, fixed-quantity currencies like Bitcoin will deflate. There is a daily Bitcoin loss, only 21 million Bitcoins can be mined. Thus, the good is intentionally scarce, raising its price. Although demand for alternative projects with supply constraints is uncertain, their value should rise as supply lowers (assuming demand exists).
Before throwing all their fiat money at digital assets, people should know a few facts about Bitcoin. Deflationary projects are only those with total supply limits. Approach to Inflation Protection: Any infinite, open-ended generation process like Ethereum would work as such more than fiat currency. This is not to claim the asset is worthless but to argue for currency minting regulations to curb inflation.
Even though Bitcoin can potentially revolutionize monetary systems, it is still emerging. Despite lofty promises, no cryptocurrency has replaced fiat money and served as a medium of ordinary value transfer. The area’s many projects make it unlikely that all will succeed and raise demand and price. The main cryptocurrency may not be the standard in five, 10, or twenty years. Money may evolve from something new by 2050. All of this is speculation, but that’s the point. The value of many digital assets is predicted to rise, although this is uncertain.
Conclusion
Cryptocurrency has the potential to fulfill its original promise of bringing about a new financial system. There is an abundance of assets that can be used as a buffer against fiat inflation at the moment. However, each investor is responsible for conducting their research and arriving at their conclusions. Even while many people have discovered that these investments yield far higher returns than holding national currencies, nobody knows what the value of a Bitcoin will be in 20 years. The future of cryptocurrencies is still very unclear.