Cryptocurrencies Could be a Permanent Solution to Stagflation

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Crypto Regulation
Cryptocurrencies Could be a Permanent Solution to Stagflation

Inflation is currently bullying many countries including giant economies like Canada, the US, China, and the UK. A recent CNBC report noted that inflation in the US rose by more than 8.3% in April compared to last year. Moreover, the current inflation rate is much higher than the projected rate of 8.1%. In Canada, inflation rose from 6.7% in March to 6.8% in April. The UK also saw a rise in CPI to 9% in the preceding 12-month period and an increase from 7% in March

What is Stagflation? 

Most giant economies are currently facing increasing inflation. While central banks set systems to contain inflation, some top market analysts warn that their policies could lead to stagflation. So, what is stagflation?

Stagflation is a situation in the markets where the inflation rate remains very high, but the general economic growth is low, and unemployment also rapidly increases. Stagnation is a situation where the economy is stagnant, but inflation keeps rising. Even the policies set by the central bank don’t appear to control inflation but instead slow down growth. 

The US and China appear to be facing this issue, which is increasing at an accelerating rate. For instance, while the Fed is raising rates, the inflation is rising, and most recent reports show that jobless claims have increased above projections. 

China, another economic giant, appears to be headed into a similar problem. The inflation rates rose super fast this year. More recent reports indicate that the unemployment rate in the country has increased vastly in just the past few months. There is already a threat, if not an occurrence, of stagflation, in several giant economies globally. But, the cryptocurrency space could offer a long-lasting solution to this limbo.

To Contain Stagflation, You Must Control Inflation 

In the monetarist’s school of thought, the best way to control or deal with stagflation is by dealing with the heart of the problem, i.e., inflation. Many factors trigger inflation, but the primary definition is too much money in circulation, leading to currency devaluation. However, cryptocurrency has always been a hedge and protection against massive inflation. How?

Fixed Supply

Fiat currencies are susceptible to inflation because the central bank can quickly increase its supply. Many central banks end up excess printing money and releasing it to circulate. For instance, a report indicated that the USD printed in 2020 alone was a fifth of the dollar in circulation. 

The Fed printed around $10 trillion in December 2020 and March 2021 combined. Usually, the impact of too much money in circulation is seen months after printing. It appears the increasing inflation in the US is partly driven by the central bank printing policy. 

But, the crypto space can give a hedge against inflation. For instance, Bitcoin fixed its supply at 21 million. In this case, the network will never create more BTC. It’s almost impossible for BTC to devalue because of excess circulation.

Even more recently, reports indicated that the amount of BTC in exchanges is decreasing. With less BTC circulation, there will never be cases of excess supply of the coin; hence no devaluation is forced with overprinting. Countries like El-Salvador, and the Central African Republic, which adopted BTC, run less risk of inflation caused by a massive supply of the legal tender.

What about other cryptos with no fixed supply? Most crypto networks have instilled systems to ensure the coin supply remains balanced within the economy. For instance, token burning is a popular system that has been adopted by top networks, including ETH. Most crypto networks manage the supply by burning tokens, sometimes leading to deflation.

Decentralization

Another reason why cryptocurrencies could solve the stagflation issue is their decentralization. Fiat currencies as susceptible to inflation because they are centralized. While trying to deal with inflation, the central bank may increase interest rates. When the interest rates rise, fewer people will take loans, reducing jobs and causing stagnant economic growth.

But, by decentralizing the control of money, policymaking also becomes decentralized. Any changes must pass through approvals before implementation in networks like Bitcoin, Ethereum, Cardano, and others. The decentralization of crypto-assets activities can help ensure that the policies positively impact the economy.

Stagflation Could Foster More BTC Adoption

The much-predicted stagflation could be a blessing in disguise for the crypto space, and especially BTC. Many investors often prefer using BTC to hedge against high inflation. Remember, massive inflation means the dollar loses its high purchasing power. Therefore investors prefer to hold their money in other assets like Gold and BTC. 

While gold has always been a haven, BTC has outperformed gold in growth in the past decade. Its been called digital gold because it can store value, and its volatility can create massive gains. The ability of BTC to store value, gain profits and recover fast in case of bears is one reason why investors will continually turn to this coin during stagflation.

Can Cryptocurrencies Solve Stagflation?

The simple answer is YES; crypto-assets can offer a permanent solution to stagflation. The monetary policies used by central banks to control inflation could quickly drive the economy into stagflation. But, crypto provides an advantage. 

Although crypto is highly volatile, it’s still seen as a hedge against inflation because it always recovers. BTC and other cryptos have fixed supply, meaning that the economy will never have excess supply. If there is zero inflation, then stagflation will also not exist.

Wayne Jones

Wayne is an all-rounded cryptocurrency writer who has written for several publications in the fintech industry. Having graduated from the University of Essex Colchester, he developed a passion for blockchain technology and has been curious about how the blockchain can modify the traditional financial industry.