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:
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.
Bitcoin has been the fore-runner amongst the stream of digital currencies that are set to disrupt Fintech. With growing popularity and adoption, the Bitcoin ecosystem has developed rather quickly owing to its underlying technology. Major financial institutions trying to exploit Blockchain technology has called for drafting legislation on this front. While all this looks positive, let’s look into if the cryptocurrency can actually replace fiat currencies:
Evolution of means of Exchange
Historically Barter system has been a strong medium of exchange; gold coins, beads and feathers later replaced it. Finally we have arrived upon fiat currencies or paper cash. As such the paper cash doesn’t have a value of its own. Backed by Gold reserves with central banks, they have served as store of value for a long time.
The ‘Gold Standard’ collapsed with the ‘deflationary’ Great Depression of 1930. Then on, the backing of currency by Gold slowly disappeared into shadows. The fiat currencies started to run mostly on backing of central banks. From an exchange of value, the monetary system shifted to an exchange of confidence issued as currency by the government.
Bitcoin vs Ideal Currency
An ideal currency should stand good on these three important characterstics:
Easy and convenient means of exchange
Should serve as a unit of account
Act as a viable store of value
Bitcoin would fulfill the first criterion with flying colors as it has been one of its major selling points. It is a borderless, zero fee peer to peer transaction network. In the second criterion, unit of account implies being able to get goods and services in exchange. Bitcoin can serve as a better unit of account on the basis of having uniform value across borders. For the third criterion, Bitcoin faces some challenges due to high volatility currently. But with better adoption, the currency will achieve stability and can transform into a safe store of value. Hence Bitcoin looks good on all criteria for an ideal currency.
Why Bitcoin will win
As an alternative to the current monetary system, we can fall back on Barter System or exchange through solid Gold. But barter system is highly inconvenient owing to unequal valuation of goods and services. While Gold can hold value, it is difficult to carry the same securely at all times. Hence the technological alternative in the form of cryptocurrencies would be best fit solution for replacing fiat currencies.
Contrary to people’s speculation, this change wouldn’t be so hard to accommodate. This is because all the transactions today are carried out electronically over wires, net banking, paypal and other means. Roughly about 10 % of the transactions are actually dealt in hard cash. Adopting a system that would make these dealings easy and peer to peer would be a welcome change. It is just a matter of time and fluid adoption after which Bitcoin would become primary means of exchange. All it needs is people’s confidence similar to what they currently have in paper currencies.
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