ViaBTC|Can Cryptocurrencies Hedge Against Inflation? Yes, They Can

Have you ever gone to the supermarket with your grandparents? If so, you probably have heard them say: “When I was young, beef and veal were way cheaper”. Old folks do like to talk about how cheap things once were, and they are right, prices were indeed a lot lower decades ago. However, as the living standard rises, the inflation rate has also soared, resulting in a continued surge of prices. This is why beef and veal costing $20 in the year 1935 would cost $610.18 in 2021 for an equivalent purchase.

Let us take a look at how inflation is defined. In the circulation of currencies, inflation refers to a general and continued rise in the price level of an economy over a period of time caused by a currency depreciation that occurs when the supply of a currency exceeds its actual demand, i.e. when the purchasing power of the currency becomes lower due to excessive supply. Simply put, inflation means the supply of banknotes is way larger than what is needed.

In the past two years, governments have been cranking the printing presses like mad to provide a stimulus for the economic stagnation caused by COVID-19 for the past two years. This is particularly true in the United States, where almost 30% of the total dollar supply was issued in the past year. As a result, the U.S. inflation rate has reached a 13-year high. The banknote printing spree has had a tremendous impact on the sound development of global economies.

Since ancient times, gold has always been a hard currency. In the face of uncertainties such as wars and financial crises, most people would buy gold as a hedge against inflation and inflationary risks. However, people are now turning to another long-term store of value: cryptocurrencies, especially mainstream tokens such as Bitcoin. In the case of Bitcoin, the total supply is only 21 million, and, unlike fiat currencies, Bitcoin cannot be manipulated by changing its interest rate or total supply. As such, this cryptocurrency has become a store of value that protects assets against inflation.

Let’s take a look at the specific changes in the annual inflation rate of cryptocurrencies like Bitcoin and Ethereum. The annual inflation rate of cryptocurrencies is calculated using the below formulas:

Annual additional issuance = total supply at the end of the year - total supply at the beginning of the year

Annual inflation rate = annual additional issuance / total supply at the beginning of the year

Using the above formula, we calculated the inflation rate of Bitcoin in the past five years:

The inflation rate of Ethereum in the past five years:

From the two tables above, it is clear that the inflation rates of both Bitcoin and Ethereum are declining every year. On the other hand, mainstream fiat currencies such as the U.S. dollar and the Euro suffer from volatile inflation rates and are susceptible to changes in the international environment. In contrast, we can predict the inflation rate and issuance of Bitcoin. According to forecasts by the relevant institutions, the inflation rate of Bitcoin will stabilize at 0.4% by the time of the fourth BTC halving in 2024.

According to the usual practice, countries that have adopted the policy of inflation targeting will set the annual inflation rate between 1% to 3%. The relevant data shows that the U.S. inflation rate stands at 5.3%, and the inflation rate in Germany and the United Kingdom is 4%. The normal inflation rate in developed countries in 2021 is projected to be 2%, and that in developing countries will be 4%, according to forecasts by the International Monetary Fund. Additionally, international rules have specified that a country is deemed inflationary if its CPI exceeds 3% for six straight months. Compared with these figures, the inflation rates of Bitcoin and Ethereum are far lower.

As minable bitcoins become increasingly fewer, the BTC inflation rate could be less than 1%. Moreover, BTC transactions are much more convenient than trading gold. In the long run, cryptocurrencies like Bitcoin will prove to be a smart way to cope with inflation and eliminate inflationary risks.

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