Typically inflation is defined as a general rise in prices thereby adversely impacting the cost of living, financing, and doing business. As per a blog by Binance, since inflation has been a persistent danger to the value stored in money, people frequently take measures to safeguard themselves by investing in assets that hold their value over time. Historically, gold has been used as a hedge against inflation, but in recent years, cryptocurrencies have gained in popularity as a viable alternative. “Cryptocurrency can help struggling economies beat inflation. Inflation being the function of demand and supply, monetary policy can influence the demand side in managing inflation and inflation expectations. Loose monetary policy by central banks the world over has led to excessive liquidity (currency in circulation) which in turn has led to demand and inflation,” Maulik Shah, co-founder and CEO at Almus Risk Consulting LLP, a forex treasury outsourcing company told FE Blockchain.
As per Statista’s most recent data, certain nations are struggling with hyperinflation, including Venezuela, which was rated first with a staggering inflation rate of 19,906% in 2019. Zimbabwe came in second after that with a rate of 255% inflation. Argentina was next, coming in third with a 53% inflation rate. Their respective currencies suffered as a result of increased inflation rates.
According to industry experts, crypto challenges the basic framework of monetary policy – with most crypto protocols eliminating any third party controlling the flow of the exchange instrument, the decentralised finance (DeFi) framework. “There’s no printing of currency for stimulation or even control of currency in circulation by central banks or similar entities and therefore a situation such as too much money chasing too little goods does not arise,” Shah stated.
For Sankhanath Bandyopadhyay, an economist at Financial Sector, crypto can be considered a hedge against inflation. “Moreover, while inflation erodes value of each assets or currency, there is no logic of holding any inflation-bearing asset, on the other hand, since crypto is a decentralised asset (DeFi), at least crypto investors can think of making positive return during inflation (whether they can make or not this is an empirical question),” Bandyopadhyay added.
Meanwhile, except for a few countries like Salvador and the Central African Republic, no country has allowed crypto to be used as a medium of exchange and therefore its wide acceptance will always be limited and likewise its impact on inflation control. “Bitcoin investment is likely to increase during inflation as it is a decentralised asset. It does not get impacted by money supply increase, decrease, or due to changes in interest rate. Therefore, Bitcoin is also fixed in supply, hence sometimes it is thought like a hedge like gold. However, the relation with inflation may not be always very straightforward; for a variety of complex reasons, investors’ psychology,” Shah added.
Furthermore, John Boyd, Ross Levine & Bruce Smith published a research paper in 2001 titled “The Impact of Inflation on the Financial Sector” and stated that the inflation rate of above 15% caused a significant drop in financial sector performance and pushed investors to find other investment alternatives.