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March 8, 2019

Cryptocurrencies vs Inflation?


There is a huge difference between inflation cause and effect. The problem is most people call them both inflation. With this in mind, it is easy to understand why there are so many misconceptions associated with the effect of cryptocurrencies on inflation. Some people say that digital coins can be a solution for struggling economies while others argue that this is not the case. What is the truth?

Cryptocurrencies As The Solution To Inflation


The main benefit mentioned about using Bitcoin is that supply is not controlled by a government, organization or individual. The only way to get Bitcoins is to use computing power, making everything energy and time intensive. Limits were built in the development algorithm in order to guarantee a limited supply of bitcoins.

Cryptocurrencies cannot be minted so they are not controlled by governments. Instead, entrepreneurs that expended effort, computing power and time controlled the “issuing” of new bitcoins. Many thought that this can eliminate the price inflation of Bitcoin. However, Bitcoin price was influenced by external factors, like:

·         Speculative demand caused severe price fluctuations.

·         Quantity limit puts pressure on prices.

As use increases, price increases. This means bitcoin value is built to increase but what you buy with the cryptocurrency decreases. Currency scarcity leads to deflationary force.

Bitcoin Or Ethereum?


If you visit any cryptocurrency news site, you quickly notice that Bitcoin is not the only cryptocurrency that exists. In fact, there are others that are now strong, including Ethereum, which was the first competitor Bitcoin ever had.

There is one huge difference between Ethereum and Bitcoin. They both reward the entrepreneurs that mine the currency but Ethereum has extra code, making it more than a currency. It also offers a really strong blockchain platform that can be used to create distributed applications. Ethereum is thus also a strong commercial vehicle. As developers use Ethereum to build applications, demand increases. Market value then increases.

Both of these cryptocurrencies were promoted as being able to help countries that struggle with inflation problems, but the truth is different than what many think.

Will Cryptocurrencies Help Struggling Economies With Inflation Problems?


Diar, a blockchain research company, recently showed the fact that there is no cryptocurrency out there that can pull a country out of financial problems. This is mainly because of massive purchasing power degradation and arbitrary supply inflation.

In order for a cryptocurrency to be able to “fight” inflation, the purchasing power has to stay stable when compared to the normal currency that it tries to replace. There is some type of inflation associated with every single major cryptocurrency on the market.

As an example, the year-to-date inflation of cryptocurrency DASH is 84%. In the event that you buy DASH that is valued at $10,000 when a year starts, by the end of the year it would be worth $1,600. The idea is to have value storage but using DASH would be a horrible option for that.

Bitcoin is now the crypto-asset that has the title of least inflationary. However, the year-to-date inflation level of Bitcoin is still more than 50%.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters.com All Rights Reserved | Facebook | Twitter | YouTube | Email Digest

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