inflation Archives

Global Inflation Surprise Index approaches a 5 year high, alternative investments like Bitcoin to surge?

Posted on February 6, 2017 | by [email protected]

With most of the countries following a Credit based economy to attain their developmental goals, they are unknowingly and slowly hampering their economy. The countries opting for debt based structure would have to see a significant improvement in overall economic performance to match up the void created by the model. Many a times, this is where economies lack resulting in crippling inflation whose effects last for longer than anticipated. Currently ‘Global Inflation Surprise Index’ is at all time high which is ominous for all the countries. Let’s dive deep into understanding what this means and how alternative investments would come in handy:

Inflationary Cycle:

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time resulting in a loss of value of currency. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. During inflation, people’s confidence in the currency decreases which leads to increased investments in alternative investments like Gold, foreign currencies and exotic commodities to hold the value of investments.

Global Inflation Surprise Index and its implication:

Global Inflation Surprise Index measures surprises in Inflation as compared to expectations. This means how high or low the inflation is as compared to the expectations/forecast of the analysts. As per Bloomberg, the Index is at the highest for the first time in more than five years. The reading turned positive in December and continued to stay so. This means that the inflation data is higher than expected for the first time since 2012. This is alarming as the index takes into account the status of all the countries and with Venezuela, Brazil and European Union in turmoil; things are more complicated than they appear.

How Bitcoin and alternative investments get impacted:

During the period of inflationary crisis, people invest in stable foreign currencies, gold and any commodity that can act as ‘store of value’. Bitcoin has dubbed itself as a very reliable store of value and earned the name of ‘Digital Gold’ owing to its non-correlation with other commodities. Hence we can expect steady rise in Bitcoin prices over period of time powered by debt stricken economies around the world. In good measure, Bitcoin might as well go onto become a transactional resource as it was intended to in the first place.

Brazil in Deep Trouble: Bitcoin and Blockchain are what Brazil needs right now?

Posted on October 12, 2016 | by [email protected]

Recession stricken Brazil is the world’s seventh largest economy with a population of 207.8 million and GDP of US$1.775 trillion. Brazil’s worst recession in recent history continued as rising unemployment and deepening political turmoil dragged the economy into further decline. In the second quarter, Brazil’s economy contracted 3.8%, after shrinking 5.4% in the first three months of the year. It’s the longest recession since the 1930s for Brazil, Latin America’s largest economy.

The situation went from bad to worse as the President Dilma Rousseff was impeached owing to large scale corruption. While the proceedings in Brazil are currently bleak, let’s look into the possibility of Bitcoin adoption setting things right:

Bitcoin adoption currently:

The Bitcoin adoption in Brazil has been on the rise owing to the varying economic conditions. The recession cycle followed the pattern where Brazilian Real appreciated first and then went on to depreciate starting a probable hyperinflationary cycle. During the course of this pattern, there has been a significant uptick in the Bitcoin trading volume from Brazil. The dynamics of the economy and exports prompted people to look for alternatives, which turned out to be Bitcoin.

Brazil is the largest exporter of soft commodities in the world. During the deflationary part of the cycle, the Brazilian Real appreciated due to significant capital inflows. For major exporters, this was a setback as they wouldn’t be getting more local currency in exchange for their goods. Hence an alternative, they turned to receive payment in Bitcoin to be later converted into local currency when Real depreciated.

How Bitcoin can be a solution:

For an economy that is struggling, people’s faith in its currency fading, an alternative system has to be opted. Just like Government bonds where the Government backs fiat currencies, the central bank can alternatively back Bitcoin based assets. What makes this even more feasible is the transparency the underlying technology provides in such arrangements.

This decentralized system can be in place till the economy achieves stability. Later the asset holders can cash in for local currency. These assets unlike bonds can be transacted peer to peer without any processing fee.

How Blockchain adoption would be a relief:

The settlement time in Brazilian market is abnormally slow. The average settlement period for credit card transactions in Brazil is D + 28 which is very slow compared to western markets. Slow settlement times amount to loss of value of transactions due to holding up of the money. This would mean the loss of investment opportunities in time. A study by PWC revealed that Brazil has over 22 million [small and medium-sized enterprises] and micro-businesses. The mobile penetration is upwards of 132%, which has created a fertile ground for mobile payments.

Hence Blockchain based settlements which are quicker and more transparent are exactly what Brazil is looking for. Fortunately there has been significant development on this end with major banks and Mastercard trying to implement Blockchain based transactions in Brazil.

Can Bitcoin be the saviour during the next Global Financial Crisis?

Posted on October 3, 2016 | by [email protected]

The housing collapse in 2008, that shadowed the global financial markets, has had gripping repercussions on the global economy. With Greece, Venezuela and many other European countries still trapped in high recession, their economies are looking shaky and unstable. This is the consequence of the Great recession and countries are still feeling the ripples of it. As much as we don’t like it, another economic crisis is inevitable if the monetary policies aren’t very effective.

An economic crisis is a signal of how the existing monetary system has failed, which prompts for alternatives. Outside precious metals and the good old barter system, Bitcoin appears to be the best fit alternative to the existing system. Decentralized, border-less, peer-to-peer, and open-access digital currency surely seems to be a best fit in the face of calamity. Let’s look into how prepared Bitcoin is for the next Economic Crisis:

Sailing on both Tides:

An economic collapse can be of two types: Inflationary and Deflationary

Inflationary collapse or hyperinflation happens when an economy experiences very high and usually accelerating rates of inflation. This rapidly erodes the value of the local currency causing the population to minimize their holdings of local money. The population normally switches to holding relatively stable foreign currencies. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. The value of economic items remains relatively stable in terms of foreign currencies.

Deflationary collapse or Deflationary spiral happens when a period of decreasing prices leads to a situation whereby the economy collapses. Deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods and services than before with the same amount of money. Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt. This may aggravate recessions and eventually lead to a deflationary spiral.

How Bitcoin would fare under both circumstances:

Inflationary collapse:

In an inflationary collapse, people would be scrambling to buy bitcoin and other solid assets such as gold. This would be in an effort to preserve their savings from the debilitating effects of inflation. But for Bitcoin to be favored over other assets, the adoption level of Bitcoin should be very high. The digital currency should evolve to a stage where it can be used for all day to day transactions. This is prevalent in countries like Argentina, Venezuela and Greece. Users are actually looking at Bitcoin as an alternate to acquire foreign currencies and goods.

Deflationary collapse:

In this case, for Bitcoin to actually be preferred as an escape option, the currency should see mainstream adoption. The central banks and lenders should be able to accept Bitcoin in exchange for debt in fiat currencies. Unless the scenario is that positive, you’d see a massive selloff of bitcoin. This is because people would want to get as much USD as possible in order to pay debts.

In a financial crisis, there are limited tools available to sovereign entities to stem the crisis. Devaluation, bail-ins and capital controls are the go-to tools, Bitcoin counters them all. Bitcoin extends the basic properties of good money with extreme, no-cost portability, security and stealth. These properties are extremely valuable in cataclysmic financial collapse. However its utility majorly depends on adoption of the cryptocurrency before the impending crisis.

Fiat currencies and Banking technology slowly leading to centralization: Is Bitcoin the savior?

Posted on September 29, 2016 | by [email protected]

Paper currency is a recent man-made or rather bank made concept to facilitate exchange of goods and services. Historically mankind has opted for outright bartering, gold, coins, beads, feathers and finally paper currency for goods and services. Currently, new means of exchange based on technological solutions are slowly replacing fiat currencies. While this might seem positive on the outset, it may lead to a centralized future with central banks in authority. Let’s dive deep into this to see how this is a misleading notion:

How cash is devalued:

When the economy is facing inflation, Government brings in more money into circulation. This leads to devaluation of the currency but control over the levels of inflation. This process of bringing more money into circulation is ‘Quantitative easing’. The opposite process where the central banks offer high interest rates for storing money is ‘Quantitative Tightening’. This tactic increases the value and purchasing power of money for a healthy economy. Alternating these tactics, the central banks try to keep a check on inflation levels.

However most of the times, imbalances of these strategies end up hampering the value of the currency and economy. During high levels of inflation, when the state has generated the maximum amount of money, it might not be adequate. While the currency is anyways devalued, the central banks cannot offer interest for money stored with them and hence interest rates go negative. That means public has to pay for keeping their money with the bank which is highly undesirable. This is the current state of affairs with most of the European Union central banks.

Technology is a solution?

At this point, it might appeal that a technological solution to replace paper currency might be an apt solution. But the paper currency we use for various transactions is a drop in the ocean compared to other channels. Over 90% of all economic transfers done are digital and not in common “cash” currency. Generally wire transfer, debit cards, credit cards, Paypal are used for vast majority of your bill payment and daily purchases.

The problem owing to technology and various mediums of transfers, we are paving way for centralization. By totally relying on technology we are bidding good bye to our privacy. Our card issuing banks have complete access to our personal deals, purchase patterns, history of personal finance. These details can be made available for third parties for marketing and promotions. Banks/the government get complete control over privacy, accounts and access. Everything becomes centralized onto banking/government servers. Tie this together with government monitoring of emails, phone calls, social media and it becomes a web of centralized control. This is undesirable and this motions us for a decentralized solution.

How Bitcoin Fits:

While we are looking at technological solutions to overcome the nightmares of banking strategies, it has to be decentralized. Right from its inception that has been the selling point for Bitcoin. A digital currency that can be transferred over a decentralized network without the presence of a third party. Hence considering how the central banks are slowly edging towards a centralized future for banking, Bitcoin might be our solution to achieve total financial freedom and anonymity.

Is Bitcoin the escape hatch for Venezuela?

Posted on August 10, 2016 | by [email protected]

Venezuela growing economic crisis

Bitcoin Analysis: Point of no return:

The International Monetary Fund projects that Venezuela will face a dire recession in 2016. The contraction has been 8% which surpasses the 5.7% reduction in 2015. The prediction is that the inflation will rise by 500% in 2016 and might hit 1000% in 2017. The real problem started with the installation of a Socialistic regime in 1999. Henceforth, the country hasn’t been able to produce food and other commodities sufficient for self-sustenance. On the other hand, the Government has been taking control of major companies in private sector and providing very less for the workers and population. Venezuelan government has been imposing unpopular measures to help the economy recover with disastrous results ever since. Nevertheless the situation has been deteriorating and the country is led down the spiral of Hyper-inflation.

Bitcoin as an alternative:

With the country’s economy being asphyxiated by various other factors, Bitcoin can be an escape hatch for its citizens. The devaluation of its currency, Bolivar and strict capital controls which prevent people from converting into other currencies has become the brunt of the problem. Converting the local currency into stronger currencies like US dollar, Euro or even Columbian Peso is being restricted. The status of Bitcoin is unclear in Venezuela with authorities treating Bitcoin more as property than currency. This offers more benefit than the strong fiat currencies. It can be used to purchase goods online, send and receive money and act as store of value. More businesses in the same line would also provide better employment opportunities.

Is Bitcoin the escape hatch for Venezuela? by Bitcoin_IRA on TradingView.com

People’s acceptance:

Venezuela has recently set a new bitcoin transaction volume record, which has seen exponential growth since the start of 2016. Bitcoin trading volume in the first week of August has reached 141,744,733 bolivars (about $141,000 USD), outperforming the previous week’s record of 117,116,539 bolivars (about $117,000).

With the country’s inflation rate sitting over 500%, people have already started to take up Bitcoin as alternative. What crucial role this cryptocurrency has to play in restructuring Venezuela’s economy is to be seen.