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Does Inflation Affect How Much Crypto I Can Buy?
Inflation seems to always be changing the price of everything around us, but is it affecting how much crypto I can buy? Generally speaking, as inflation increases, the value and thus buying power of your cash (USD, CAD, GBP) goes down. Specific cryptocurrencies with a large number of users, or a finite supply like Bitcoin tend to increase in price during periods of high inflation. In other instances, cryptocurrencies that are illiquid, or the majority supply is held by a small number of people, tend to decrease in price.
Let’s dig into each of these scenarios, and talk about what influence inflation has on different kinds of assets.
Low Inflation & Finite Assets
Bitcoin is an asset that is poised quite well to hold up under inflation. It has been called many things, and “inflation hedge” is one of them. Although bitcoin is volatile, the general direction and trend of its price over time is up. From an overly simplistic point of view, Bitcoin is an asset with a finite supply (21,000,000) and an ever-decreasing inflation rate. Eventually, in the year 2140, the inflation rate will predictably and reliably be 0. At this time, all 21,000,000 bitcoin will have been minted into circulation. This is in stark contrast to the ever expanding money supply we see happening with fiat currencies all over the world.
The result of inflation on a scarce asset like bitcoin is that it takes more and more units of currency to buy less and less bitcoin. In this respect, inflation is certainly contributing to the amount of bitcoin that someone can buy.
High Inflation and Crypto Scams
It is worth noting that Bitcoin is a bit of an exception in the world of cryptocurrency. The supply of many cryptocurrencies are actively managed or influenced by centralized groups, may it be owners or dev teams.
An all too prevalent story is that many people are convinced to buy a cryptocurrency because of X, Y, Z reasons. At some point, the administrative team runs out of money to pay people to develop the project, or the cryptocurrency turns out to be a scam from the start.
In either case, a likely outcome is that the administrators will mint (create) many new units of cryptocurrency, causing inflation, and sell it into the market to re-capitalize their business. When this happens, macroeconomic inflation has very little effect on the price of smaller “low-cap” coins.
Network Effect Driven Value
Macroeconomic inflation has a big impact on the price of cryptocurrencies, but only if the coin exhibits certain properties and characteristics. Bitcoin’s finite supply is useful against fiat inflation, but it’s not everything. Cryptocurrencies exist within networks, and a certain portion of the value of cryptocurrencies is that the network provides a common way for participants to share and exchange value.
This is why a cryptocurrency like Ethereum manages to stick around and do well against fiat inflation. Despite Ethereum not having an explicit limit on the number of ETH that can be created, it has retained and increased substantially in value since its inception. This is in no small part due to the number of people using the network itself. The inflation rate of Ethereum ranges between 2-8% depending on several factors.
The point is that despite an inflation rate that is comparable to that of the USD, Ethereum has grown in number of users. Inflation has little effect on dampening the value of network effects, especially when those network effects take place on “value networks” such as Bitcoin and Ethereum.
The Ever Expanding Debt
All United States Dollars are debt. Each and every dollar ever created, is ultimately owed to the creator of dollars, the United States Federal Reserve. Although it seems absurd, it is true that more than 80% of the dollars in existence were created after 2020. So it is no wonder why we get very large boom and bust cycles in the world of cryptocurrency. It is in no small part due to the rapid expansion of the monetary supply. There are of course, many other factors, but it would be an error to leave the influence of inflation out of the equation.
How Much Crypto Can I Buy Over Time?
The amount of crypto that you can buy over time varies from cryptocurrency to cryptocurrency. For things like ETH and BTC, the answer is that it is likely that you’ll be able to buy less. Both assets are founded on networks that are growing at a very fast pace.
Additionally, the market for ETH/USD and BTC/USD are actually incredibly large. Bitcoin, for example, consistently trades tens of billions of dollars per day. These are financial assets that have demonstrated a remarkable ability to preserve value against the constantly decaying value of the USD.
For other assets like LUNA, the project completely went bust in a matter of days and sank from more than $100 per coin to less than $0.01 per coin. In this instance, you could buy a lot more of that crypto than before, but then again, would you really want to?
Inflation is Inescapable
Although there are ways to dampen or lessen the effect of inflation, to one extent or another, it is inescapable. Inflation ends up increasing the value of many things in society, the exception is deflationary technologies according to Canadian author Jeff Booth. Since cryptocurrencies like Bitcoin are within the category of deflationary technologies, then as inflation goes up, the amount of bitcoin you can buy goes down.
The ultimate aim for any project claiming to be an inflation hedge or tool for financial liberation must eventually become ubiquitous and spendable throughout society. When this day eventually comes, a little bit of BTC will go a long way.
