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Ask CryptoVantage: Is High Inflation Good for Crypto Adoption?
By now, wherever you are in the world, you’re living with the impacts of heightened inflation. The average cost of goods and services is rising at a concerning rate. Inflation is caused when governments introduce additional currency into the system. Increasing the supply decreases the value of each unit.
There are three main types of inflation: demand-pull, cost-push, and built-in. Demand-pull inflation refers to situations when demand outpaces supply. Cost-push inflation refers to an increase in price due to the cost of producing the goods or services rising. Built-in inflation is also referred to as a wage-price spiral. It’s caused by a vicious spiral when workers demand higher wages to keep up with the rising cost of living. Businesses grant the increases in wages but offset it by raising the cost of producing their goods or service, which in turn leads to workers demanding higher wages again.
It’s very easy to see how each of these types of inflation apply to contemporary life when combined with the massive stimulus packages that governments have introduced during the COVID-19 pandemic.
Is Inflation Actually a Bad Thing?
Modern monetary theory would lead us to believe that government stimulus and inflation don’t always have a negative impact on an economy. In fact, a small degree of inflation is necessary to keep the fiat economy stimulated and growing.
If the value of the currency you are using and its purchasing power is decreasing every year then you become incentivized to spend the currency today rather than save it for tomorrow. Spending your currency stimulates the economy and leads to more borrowing and growth from the business sector, which increases the number of products and services, as well as higher-paying jobs for workers.
When it Gets Bad
Most central banks aim to keep inflation between 2-3% to have a healthy economy that incentivizes spending over saving. Markets do best when there is predictability and stability.
When inflation becomes too high and citizens can’t afford to purchase goods and services the economy will enter into a negative spiral and begin to contract. High inflation reduces spending, taxes collected, employment levels, and government services offered.
The Case for High Inflation Being Good for Crypto Adoption
There are two main areas where high inflation can be a good sign for crypto adoption. The first can be seen in extreme circumstances where countries encounter hyperinflation. Hyperinflation is typically measured when inflation increases by more than 50% a month. Famous examples where countries experience hyperinflation are in the 1920s German Weimar Republic, 1990 Peru, and 2008/2009 Zimbabwe. For citizens living in a country experiencing hyperinflation crypto can offer a lifeline. When high levels of inflation begin, citizens can transfer their savings into stablecoins that hold their value while their native currency devalues.
The second example of when high inflation can be a good sign for crypto adoption is when inflation exceeds the 2-3% acceptable levels of the central bank. Most countries are in this scenario now which is evident from Canada and the U. S’s inflation figures.
Canada
USA
These examples show a clear devaluation of traditionally strong fiat currencies and a loss of their purchasing power. Every U.S dollar that was earned and unspent last year has lost 8.5% of its purchasing power today.
Stablecoins offer great protection against failing currencies experiencing hyperinflation. They work by pegging their value to more stable fiat currencies. However, what happens when these more stable fiat currencies experience higher inflation levels themselves.
This is when citizens may look to other cryptocurrencies that hold their value better against the inflation increase of their fiat alternatives. Bitcoin is a good example of this and is often used as an inflation hedge by users.
The Case Against High Inflation Being Good for Crypto
While crypto adoption is growing across the globe it is estimated that the average ownership rate is still just 3.9%. While inflation is a very good incentive for people to start looking to crypto as an alternative or hedge. The reality is that there simply isn’t the knowledge base or infrastructure to support this on a large scale. Projects like the Lightning Network are helping to bridge the gap between consumers and accessibility for crypto payments. However, before this becomes standard practice for people, there will need to be a wholescale education on what crypto is and how money fundamentally works.
The main reason why high inflation is not a good sign for crypto adoption is simply that people do not believe they can afford to invest. During times of high inflation, unless people are receiving annual raises that meet or surpass inflation levels, they simply have less disposable income to allocate. Very few places will accept crypto as payment for rent, mortgage, groceries, or gas.
Additionally, institutional investors’ adoption of Bitcoin and other cryptocurrencies is growing, but in times of high inflation, these same institutions will look to liquidate their riskier assets. These include cryptocurrencies and tech stocks. While Bitcoin has demonstrated continued growth and stability over the long term, it remains a volatile option for investors in the short term. Coupled with high inflation it simply poses too much risk for institutional investors to have on their balance sheets.
Conclusion: Inflation Will Persist
Regardless of what your opinion is on pandemic spending, the result was always going to end in higher levels of inflation
Governments can’t introduce high volumes of new currency into circulation and not expect it to have an impact on the value of the current supply.
These inflation numbers are troublesome and are showing no signs of slowing down. Whether that leads to a crypto standard, or simply more adoption is up for debate.
