Despite the adverse effects of government efforts to control debts and maintain the economic balance, cryptocurrencies would benefit in the long term. Although crypto assets have lost their inflation-hedging properties and value this year, prolonged high inflation might be favorable.
Central banks have usually used monetary policy at 2% to keep inflation on track worldwide. However, the economic turmoil might force them to adjust it to the upside, causing damage to fiat currencies.
Governments have made efforts to control debts and maintain the economic balance. Despite the adverse effects on fiat currencies, cryptocurrencies would benefit from that situation in the long term.
During the 2008 crisis, avaricious investment banks shattered this by issuing and profiting from toxic loans. Bitcoin emerged as a hedge against banks and their interference due to an unavoidable crash. However, the financial debacle is occurring again as inflation is so uncontrollable it is hard for central banks to stop it.
Inflation Targets Increase to 4%
According to The Economist, long-standing 2% inflation targets may have increased to 4%. Jeremy Allaire, the CEO of Circle, recently commented on that “new normal” in response to a take from crypto liquidity provider Cumberland.
Revising the target up to 4% would allow central bankers to plan for a budget windfall. That would also help them create a launching platform for the imminent deflationary crisis.
However, increasing inflation targets might lead to a loss of trust, only seen as another form of QE (quantitative easing). Since inflation-proof investments are unavailable to most people, it also causes inequality, according to Cumberland.
Capital tends to flow into real-world assets such as property and commodities whose value is rising these days. However, Cumberland commented that a new class of digital assets is available worldwide for the first time in history.
The Devaluation of Fiat Currencies Benefit Digital Assets
Since markets behaved like tech stocks this year, crypto assets lost their inflation-hedging properties and value. However, market cycles usually last around two years, which means prolonged high inflation might benefit digital assets.
According to Cumberland, cryptocurrencies have become more of a devaluation hedge than an inflation hedge. However, they said that cryptocurrencies perform excellently against sustained and tolerated inflation like fiat currency devaluation.
Those properties are evident in countries like Argentina, Venezuela, and Turkey, where citizens turned to cryptocurrencies due to the collapse of their fiat currencies.
Cryptocurrencies play a crucial role in the economic system, which people worldwide know very well. That has led to their adoption in countries whose national fiat currency has lost its value dramatically.
Since no centralized authority or government controls them, they allow people to conduct cross-border transactions more quickly and safely. For example, some Venezuelans moving abroad due to the crisis in their country have used cryptocurrencies to send money to their relatives.
Meanwhile, Bitcoin (BTC) is trading at around USD 19,238 and has accumulated a 0.9% gain over the last week. While its trading volume is above USD 16.92 billion, its market capitalization is about USD 368.90 billion, according to CoinGecko.
By Alexander Salazar
