Everything from rent and mortgage payments to car loans and a loaf of bread is much more expensive than just a year ago.
The last time the United States faced double-digit inflation rates was in the 1970s. Though the Great Inflation started in the 1960s, the height of the period was marked by high oil prices in the ‘70s, which spiked the cost of gasoline. But, like today, many major global events that helped drive and define inflation took place during this time.
While the situation is a little different in the 21st century, the last few years have been the perfect storm for large-scale economic losses and rampant inflation.
What does this mean for investors watching rising interest rates, their crypto, and inflation? It helps to understand how we got here.
What Led to Recent Inflation?
Central banks worldwide responded to the COVID-19 pandemic shutdowns by initially dropping interest rates and kicking off purchasing programs. In the U.S., that included rates for corporate bonds in addition to mortgage-backed securities (MBS) and government bonds and loan programs, marking the most significant purchase program to date.
Simultaneously, national governments were conducting sizeable fiscal stimulus programs in which citizens received checks in the mail while several programs were made available to apply for assistance. These programs flooded the system with additional cash. When money is released to Main Street, it commonly goes back into the economy quickly; in other words, people spend it on food, electronics, cars, and upgrading housing instead of investing it for the long term.
On top of this, the worldwide pandemic shutdown caused supply chains to slow down or stop and become backed up. The bubbling brew of huge consumer demand, a shortage of workers, reduced distribution of goods, war in Ukraine, and anticipated demand for energy caused the largest spike of inflation the country had seen in decades.
How Does Crypto Respond During Inflation
Understanding the impact of crypto and inflation starts by visualizing how digital currencies fit into a modern economy. For example, Bitcoin’s creation was a response to what its developers saw as poor governmental and monetary management.
So, it’s hard to compare Bitcoin and other cryptocurrencies to the fiat brand of money we are used to because it’s an entirely new concept. This is why many investors are asking the question: is Bitcoin a good hedge against inflation? That may be a difficult question to answer immediately, which is why long-term diversification with crypto is more vital for investors.
The great thing about cryptocurrencies is that they stand on their own. Each is created from a digital process — whether mining or staking — and not by people borrowing to get ahead, like the fiat system. As a result, cryptocurrencies offer investors the opportunity to accumulate wealth outside the traditional financial systems.
Here is why this is important: Bitcoin and other cryptocurrencies were designed to be disinflationary. As more of each currency is created, the more difficult they become to create, reducing their risk of losing their monetary impact or purchasing power.
Inflation in a debt-backed currency is consistently positive, with variations in the inflation rate. This system is not sustainable because as more money is printed, that money thus has less purchasing power, meaning that eventually, a loaf of bread could theoretically cost $1 million because its purchasing power has been reduced.
The move to a fiat system was executed with the idea that inflation could be controlled at 2%, allowing the system to operate for hundreds of years without issues. The concept was simple: inflation would not affect the people because the increase in the population and wages would offset its effects.
The only problem is that controlling inflation in such a large and complex system is nearly impossible. Once President Richard Nixon ended the gold standard in 1971, the amount of debt in the U.S. ballooned with no end in sight because the currency is backed by debt. For more currency to be printed, more debt needs to be taken on.
Cryptocurrency as a Long-Term Investment
These examples show how the plan for a debt-backed fiat currency adjusts for the average investor during inflation. However, because there is only so much Bitcoin or any other type of cryptocurrency, the race to zero and infinitely high prices is avoided.
Interest in Central Bank Digital Currency (CBDC) is rising. It can be expected that the price of whatever cryptocurrency each nation chooses will increase until demand plateaus as everyone using it acquires the amount they need to achieve financial homeostasis. At this point, the rate of increased money supply slows until the last coin is created, allowing the currency to retain its early-day levels of purchasing power — because the total supply is restrained.
This makes cryptocurrencies an extremely attractive long-term investment. Why? When the world begins to utilize digital currency universally, record-keeping technology is an excellent way for companies to save money on general bookkeeping and data storage.
Crypto vs. Inflation
So, are cryptocurrencies a good hedge against inflation? The answer will pan out in the long term, though expectations are high. What is the best way to invest in this idea? Financial advisors are beginning to recommend removing long-term investments from the traditional financial system, and opening a tax-sheltered retirement account makes the most sense.
Opening an account is simple and much faster than traditional institutions. Bitcoin IRA provides the best crypto IRA security** with BitGo, live customer service, and plenty of education to speed up your knowledge base on crypto assets. Download the app or head over to Bitcoin IRA and learn more today!
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