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Cryptocurrencies, a lifeline for inflation?

In Colombia and the world, inflation has become a risk for the economy of citizens and the resources safeguarded in savings. 

To understand the relationship of this phenomenon with the use of cryptocurrencies, it is necessary to define the term 'inflation'. Inflation exists when there is a general increase in prices for most products and services, resulting in the fact that for the same money less products can be acquired today than yesterday. 

In other words, inflation reduces the value of the currency over time, which will motivate people to consume and spend money instead of saving it.

According to Juan Daniel Oviedo, director of the National Administrative Department of Statistics (DANE), in Colombia, the annualized inflation for April reached 9.23%, while the Consumer Price Index (CPI) for the fourth month of the year was 1.25% and so far in 2022 was 5.66%. According to the statistical agency, the annualized variation is the highest in 21 years. 

 

Can cryptocurrencies be considered a lifeline?

In relation to the above, some investors have decided to take refuge in the purchase of cryptocurrencies as a strategy to combat this economic phenomenon, which is on the rise in both Europe and North America. Hence, it has been analyzed that the global adoption of cryptocurrencies has taken off in the last year with an increase of 881%, according to data from Chainalysis, an international data research firm.

Falling real yields, as traders prepare for inflation, increase the appeal of assets such as gold and cryptocurrencies, according to Kyle Rodda, Marketing Analyst at IG Markets.

"Financial institutions want to be part of this market and regulators don't want to clamp down too much," Rodda said.

Inflation is an important factor for cryptocurrencies

One factor that makes cryptocurrencies (especially Bitcoin and Ethereum) so appealing to investors is that they have a higher inflationary resilience compared to fiat currencies such as the U.S. dollar. 

A high inflation rate for fiat currencies can make people invest more in digital assets, as dollars or euros deposited in a savings account actually lose value over time. The same goes for the Colombian peso, which is the most devalued currency in all of Latin America, as stated by The Economist magazine in its most recent published report, the Big Mac Index.

The crypto market has a degree of complexity, but there are certain inherent functions of digital currencies that can help them resist inflation:

  • Institutions cannot control cryptocurrencies by printing more money or raising interest rates.
  • Scarcity is one of the key factors for a form of value storage to resist inflation.
  • It is a much more convenient way to store and transfer value.
Having a diversified portfolio amplifies returns

For his part, Manuel Calderón, professor of Cryptocurrencies at the Master in Finance at the Torcuato Di Tella University in Argentina, analyzed the movement of 4 cryptocurrencies during the year 2021, and came to the following conclusion: "a diversification strategy, i.e. investing in different cryptos at the same time, was efficient to hedge against inflation".

There is a risk that the value of some cryptocurrencies may vary in the market, and price crashes may occur, as we are seeing these days. However, it is more likely that in the long term, the value will stabilize or increase. These are factors that motivate people to make decisions regarding the circulation of their finances.

Would you like to maximize the benefits of the crypto ecosystem? Remember that if you have a business, you can receive payments in cryptocurrencies with Pluto Crypto POSIn addition, you can manage your assets, send and diversify your portfolio easily and intuitively in PlutoWallet.

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@spartanhill

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