Inflation’s impact on cryptocurrencies is hard to predict. Cryptocurrency has only been an asset for 10 years. Most major economies had little inflation at that period. Thus, investors have never traded cryptocurrencies during a period of high consumer price inflation until 2021/2022. This post will cover what we know, but you may want to consult a cryptocurrency-savvy financial adviser to assist you in handling inflation surges.
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Crypto Isn’t Money
Cryptocurrency does not react to inflationary pressures as international currencies do. Cryptocurrencies are touted as anti-inflationary. Cryptocurrency rises as money falls. When their currency inflates, individuals look for a better value store.
To maintain spending power, people can keep their money in Bitcoin as well as other cryptos. This will make those coins more valuable. This is untrue. It’s somewhat false. Over 2021–2022, inflation hit 40-year highs as the cryptocurrency market lost two-thirds of its value.
Although there are many predictions about the price of crypto, crypto isn’t a currency. Cryptocurrency is not cash to the IRS or SEC. The SEC classifies crypto assets into two investment categories:
Commodities
Bitcoins, like gold and silver, are commodities. Digital assets work like physical ones.
Bitcoin’s algorithm limits its supply, much as gold’s supply is limited by what’s underground. Bitcoins are not backed by a company. Bitcoins are like gold, silver, iron, and lumber—investors can purchase, possess, and sell them as the market dictates.
Securities
Like stocks and bonds, utility tokens and stablecoins can be created by the project. Tokens are securitized assets that work like any other.
A firm sells tokens on the market. They can produce or remove tokens at whim, and the project defines the token’s nature. Utility tokens, like stocks, rise and fall with the project which issued them.
Cryptocurrencies are commodities or securities, not currencies. It won’t act like money. During inflation, investors should anticipate cryptocurrencies to behave like high-risk investments.
Investments, Inflation
Two linked questions help us understand what bitcoin investors might expect:
Inflation: how do commodities & securities perform?
Inflation affects low-fundamental/high-speculation assets.
Some generic responses are available.
Inflation raises interest rates
Inflation causes the Federal Reserve to raise its interest rate benchmark. Secure, debt-based securities become more valued, reducing demand for risky investment assets. Liquidity costs can delay investment activity.
Both tendencies can hurt cryptocurrencies. Cheap money and great liquidity make investing in speculative, high-risk investments like bitcoin simpler. One theory is that investors had plenty of money and few other options, making cryptocurrencies desirable. As the Fed hikes rates, these tendencies will alter. Cryptocurrency and other capital bonuses assets will likely fall.
Commodities usually resist this connection. Most commodities rise in price before and during inflation. As materials and energy costs rise, consumer prices rise.
Metals, the sector most like Bitcoin as well as other asset cryptos, do not have a substantial price link with inflation. Gold rose approximately 600% between 2000 through 2011, though inflation was steady. Gold lost roughly half its value from 2011 to 2015, when inflation returned to the Fed’s 2 percent target.
Precious metals fare well in economic downturns. However, a recession will hurt an elevated asset like cryptocurrencies.
Stability Draws Investors
Investors desire stability amid recessions. Precious metals, like gold and silver, do well in this climate owing to their emotional and historical worth. People who want stability buy gold, which enhances its stability.
Cryptocurrency is not like this. Commodity cryptos haven’t ever worked as currencies. Securitized token-based consumer-end products have never worked. Lottery tickets run these assets. Investors who choose the correct investments can earn huge profits with little risk. In a risk-taking atmosphere with abundant money, these assets can perform well.
Uncertainty Drives Security Investing
Investors desire stability when their money becomes increasingly unpredictable. Individual investors, who dominate the crypto market, can even withdraw their funds. This can lower bitcoin prices during inflation and treble them during recessions.
However, bond yields or cryptocurrency gains have always been asymmetric. Cryptocurrency investors can not be tempted by bond gains. Despite Fed-driven increased yields, most bonds lag strong inflation. Investors who buy bonds with a 4, 5, or 6 percentage yield can lose value if inflation stays at 8 or 9 percent, which is unlikely.
These characteristics can cushion bitcoin values as investors demand assets that really can outperform strong inflation, even at risk.
Conclusive
Cryptocurrency has no trading experience during inflation, thus it’s impossible to forecast how it will affect prices. However, investors can forecast the behavior of related asset groups. If you need assistance deciding when to invest, consult a crypto-savvy financial counselor.