One of the features that most attracted the attention of people when Bitcoin began to become popular throughout the world was the use of the Cryptocurrency to combat inflation. But if we stop to think, this term is very popular in certain countries but sometimes it is not very well known in others, so sometimes there are people who do not know what this macroeconomic effect implies.
Inflation can be defined as the process by which the real value of a currency decreases over time, this process of loss of value can originate for various reasons, a clear example is the US dollar where over the years its currency has lost value due to the increase in the money supply, which causes an increase in the price of goods and services; inflation within an economy in a certain way is inevitable but it can be controlled thanks to economic measures that a country can apply.
If we synthesize it, it could be said that in a certain way, inflation originates mainly due to the printing of money in an economy. But if we take it further and talk about hyperinflation, it is basically the same but worse, since generally the economies or countries that have hyperinflation are due to an uncontrolled or exaggerated printing of money, which causes the prices of goods and services to rise. constantly and without control.
At the time of writing, many of the world economists predicted a rise in inflation rates worldwide, mainly due to the injection of billions of dollars to avoid economic stagnation in the world economy due to the coronavirus, and it is that as we mentioned earlier that inflation is generally influenced by the increase in the money supply, but there are also other factors that can affect this indicator. Despite the negative forecasts regarding global inflation, this indicator managed to remain relatively stable despite the large inflow of new money into the market.
On the other hand, Cryptocurrencies in these moments of crisis are positively affected in almost the majority of these digital assets, because in a certain way many of these currencies are designed to avoid inflation or loss of value. And many will wonder if this is really true, since Cryptocurrencies such as Bitcoin, which are the flagship inflation-resistant currency, lost almost 50% of their value after the pandemic years, approximately in 2022 the general prices of Cryptocurrencies plummeted and many did not understand the reason why, after all it is a currency that should not lose its value.
And it is that many forget the speculative factor occurs in almost the majority of Cryptocurrencies, that is why many Cryptocurrencies fluctuate in the way they do, but if we go to the theory behind Bitcoin we can understand why if It is a Cryptocurrency that is resistant to inflation.
Most likely the answer to this unknown will depend on the person you ask, and there are countries where inflationary problems have worsened to such an extent that their economies collapse and many people are affected in such a way that they choose to look for other options.
Although it is true that uncontrolled inflation in an economy is something very negative due to the consequences that we have already mentioned, it is normal for a country to have a low and controlled percentage of it. Controlled and low inflation can make an economy grow as it encourages investment and stimulates spending, which are essential for a growing economy.
Now, high inflation is something to take into account, an economy without or with very little inflation is not necessarily something positive, since without it the characteristics that we mentioned above would not be encouraged and the value of the currency increases, which sounds positive, but a currency with a very large value can harm the production of a country.
The problem of inflation is something that we must take with a grain of salt since, as we mentioned, it is not always good and it is not always bad; For example, countries like Venezuela or Argentina are countries that went through a hyperinflationary process due to bad economic decisions, among other things, people from these countries had to avoid saving, since money lost value every week; and there is also the opposite case, as in Switzerland, where there is practically no inflation, which harms its competitiveness in the market for a highly valued currency.
If we appreciate the consequences of an inflationary country like Venezuela or Argentina, it is very normal for the people of those countries to lose confidence in their own currency and look for alternatives to maintain the value of their savings; This is why many opt for valuable assets such as gold, or the purchase of real estate, but in recent years another alternative has become evident and that is Cryptocurrencies.
The main reason why many people choose to use Cryptocurrencies as a hedge against inflation is due to the design that many of them have.
At the beginning we mentioned that inflation is generated mainly by the uncontrolled issuance of money by governments, in the case of Cryptocurrencies it is very different since the emission control is regulated by the same currency. For example Bitcoin, it is said that it is an inflation resistant currency since:
Despite these characteristics, many people distrust Cryptocurrencies such as Bitcoin because its value is very volatile and somewhat uncertain, since it is also very speculative; but despite all this, Cryptocurrencies have been useful in practice, since citizens of countries such as Zimbabwe, Venezuela and Argentina have managed to protect the value of their savings using Cryptocurrencies as an alternative to inflation successfully.
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Luckily if there is, there are also stable Crypto assets better known as “Stablecoins” which are digital currencies with some security and control characteristics of Cryptocurrencies but with the fixed value of fiat currencies such as the dollar or the euro, allowing them to be a very versatile digital asset in different problems.
By simple economic theory, when a good or service is scarce, its value tends to rise, today nobody knows the real value of Bitcoin, since its price right now is very speculative, but when mining the last one there will be no incentive to continue to speculate since new units will not appear and it will be a limited good, therefore its price may increase or decrease little by little or remain stable for a long time.
More than anything due to speculation, let’s remember that we are in a world economy where the main currencies are those issued by their countries of origin and recognized worldwide, thanks to this model many people can inject this money by buying Cryptocurrencies hoping that the price will rise and receive a future performance, in the long run, will cause the value of said Cryptocurrency to rise, this speculation causes that in moments of uncertainty it causes the prices of Cryptocurrencies to plummet.
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