Can Inflation Affect Cryptocurrencies?

Inflation is the general increase in prices of goods and services over a certain period. It can also be described as the decrease in the value of the purchasing power of a given currency. There has been a great conversation on what causes inflation and how it affects cryptocurrencies.

Many crypto investors world over claim cryptocurrency is immune to inflation. With detailed research on the topic, this article aims to provide you with relevant information to enable you to make informed choices on cryptocurrency investments.

What Causes Inflation?

Several factors can influence price surges in the economy. However, there are two major drivers of inflation, including the rise in input costs and the increase in demand. Other causes of inflation include;

• Devaluation; This entails the reduction of a currency by a country's government. It is done to reduce the costs of exports.

• Loans via government bonds; This is a strategy to create a new currency stream into the market. Under this method, the state acquires bonds from the Federal Reserve. The act enhances buying power which can also create greater fallow out.

From the two main causes of inflation, we can further point out two kinds of inflation; cost-push and demand-pull inflation.

Cost-Push Inflation

In a free market economy, the prices for goods and services are determined by the supply and demand levels. When one of the two levels changes, it proportionally results in a change in price unless there is a deliberate effort to counter the change.

The production cost is the key determinant for cost-push inflation. From economic classes, the production costs denote any of the four factors that influence production. This includes capital, land, labour, and entrepreneurship.

When the cost of production increases, the aggregate supply in the economy decreases. This is because businesses will spend more resources to produce similar amounts, whereas the aggregate demand stays the same. Consequently, businesses will transfer the additional production costs to the consumer, which leads to hikes in commodity prices.

Demand-Pull Inflation

This kind of inflation occurs when there is a rise in demand for certain goods or services. When the demand for goods is higher than the supply, there is an automatic price increase. Demand-pull inflation usually occurs when the economy is growing, with a low unemployment rate.

Cryptocurrency vs. Inflation

Inflation devalues fiat currencies, the reason it has been a major concern to the global economy. However, cryptocurrency is not a legal government tender, meaning it cannot be classified as a currency. It is operated on a decentralised system under blockchain technology. Unlike fiat currencies, crypto is not regulated by central authorities like the central banks.

There has been discussion on whether inflation can affect cryptocurrency, but experts are yet to agree on how resistant cryptocurrency is to inflation occurrences. According to some experts in the cryptocurrency space, governments cannot affect the stability of cryptocurrencies. Thus it can't issue excessive crypto and devalue it.

Some cryptocurrencies, such as bitcoins, have reduced their values to 2/3 of their initial value as inflation went up. However, it is important to note that crypto is a new digital currency, which explains why there is insufficient data to ascertain whether inflation can affect all cryptocurrencies, just like it does with fiat currencies.

Is Cryptocurrency Inflation Proof?

As stated earlier, although cryptocurrencies have been in the market, there has not been enough proof to show that inflation can affect digital currencies. More data and time is needed for this question to be answered. Nevertheless, being a relatively new investment product in the market with great opportunities, it can be a good commodity worth your consideration.

Just like any other investment, it is crucial to undertake crypto investment with great care. There is a lot of misleading information available for consumption. In addition, there can be potential scams and high risks that you may need to avoid along the way.

Therefore, to be confident and sure of your crypto investment, it is advisable to buy or store your crypto under the guidance of a highly respected service provider. You can invest wisely through the support you get from such a service provider since you will receive all the assistance you need to manage your portfolio.

Final Thoughts

At this point, you now understand what causes inflation and how it affects cryptocurrencies. Although inflation is here to stay, opportunities in the cryptocurrency space are yet to reach their full potential. Therefore, you can give it a try and have a crypto investment in your portfolio.