How Do Cryptocurrencies Impact Inflation?

As inflation soars around the globe, some investors are seeking an alternative store of value. Cryptocurrencies such as Bitcoin are.

As inflation soars around the globe, some investors are seeking an alternative store of value. Cryptocurrencies such as Bitcoin are increasingly attractive options – recently surpassing one trillion dollars in market capitalization – with some experts even citing them as potential means to protect against inflation. Here’s what you should know before taking the leap yourself.

Cryptocurrencies are virtual currencies that operate under an unregulated, decentralized system. Instead of being issued by central authorities, they rely on something called blockchain technology; this is an extremely secure digital ledger where all transactions are recorded. Unlike fiat currency that is created endlessly by central banks, cryptocurrency supply is limited and considered scarce assets; experts consider this limited supply an effective hedge against inflation.

As important as it may be to distinguish cryptocurrency inflation from monetary inflation, both should be understood correctly. While inflation occurs when prices increase reducing your purchasing power, monetary inflation stems from an increase in money supply which usually leads to increasing consumer and producer prices.

Notably, it’s also essential to remember that cryptocurrencies don’t represent an efficient means for buying goods and services – thus rendering any impact on inflation unlikely. Even Bitcoin, the most well-known crypto asset, rarely uses them to purchase products; according to research only around 2% of consumers in developed countries use cryptocurrency purchases (Nguyen & Watson 2023).

People typically invest in cryptocurrency with the expectation that its price will increase over time and may seek protection against inflation or other economic problems. Their volatility makes cryptocurrencies unsuitable for daily purchases and, thus, they pose more of a risk than more established assets like stocks and bonds.

As cryptocurrency becomes more and more popular, more companies are creating exchange-traded funds to take advantage of its increasing investor base. Unfortunately, such funds face numerous risks and challenges associated with regulatory hurdles, security concerns, and market volatility that must be navigated carefully in order to be successful.

This article is meant to be used as general guidance only and should not be seen as professional financial, investment or trading advice. If you require such advice please seek professional assistance from qualified individuals in your locality.

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This guest post by Anjali Jariwala of Fit Advisors LLC.

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