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Crypto vs Fiat Inflation: The Differences and Where to Invest

by Pragati Shrivastava
Crypto vs Fiat Inflation: The Differences and Where to Invest

While cryptocurrency is floated as a fail safe for floundering economies, when faced with economic instability, blockchain evangelists are often quick to prescribe Bitcoin as a means of alleviating hyperinflation by being more stable than the local currency. But which is best suited for the task? Bitcoin or altcoins?

According to data from blockchain research unit Diar, no cryptocurrency wields the power to pull nations out of inflation. Indeed, most coins, even established ones like DASH and Litecoin, suffer from volatility due to arbitrary supply inflation or massive degradation in purchasing power. This means that nearly all cryptocurrencies are fighting a longstanding battle against inflation especially when taking its yearly average into consideration.

How then can cryptocurrency be the better choice against fiat currencies to beat inflation? Nations with a weakened economy try to leverage their economy so that its purchasing power remains relatively stable. Most of these countries have a larger number of unbanked and under-served people, so fiat currency is hard to manage. But when it comes to cryptocurrency, one only needs an internet connection and their private keys to make transactions.

It’s no secret that cryptocurrencies are highly volatile, especially with Bitcoin experiencing massive drops in value toward the end of 2019. Diar’s data shows that every major cryptocurrency platform is dealing with some form of inflation that renders it useless as a “safe-haven.”

Inflation in cryptocurrencies
On calculating the actual inflation rate, which measures the fall in the purchasing value, we determine how much of actual goods a certain cryptocurrency can buy. When the inflation rate is positive, the purchasing power declines and vice versa. Bitcoin, XRP, Nano, EOS, Stellar, Cardano, and IOTA have been deflationary year-on-year while the rest has been inflationary.

Nano, followed by Stellar, have been the most deflationary crypto assets year-on-year but, if we consider year-to-date inflation, all of the cryptoassets were inflationary. In reality, this makes cryptocurrency a horrible choice for dodging real-world economic strife.

Cryptocurrency projects cannot act as a hedge against economic instability. DASH’s year-to-date price inflation is listed as 84%, and as such, a purchase of $10K worth of DASH at the start of the year is now just worth $1,600. OUCH! That makes DASH a very poor choice for an alternative store of value, even for the world’s poorest.

Even Bitcoin, one of the least inflationary crypto assets, suffers from a year-to-date inflationary percentage of over 50%, which roughly translates into the value “stored” by Bitcoin is now worth less than half as much. By comparison, the Turkish Lira, which recently experienced a 20% drop in value, is a better hedge against economic inflation than Bitcoin.

In the end, if a cryptocurrency simply must be used as a hedge against inflation in fiat currencies, it would be one with a predetermined generation algorithm. There are coins that won’t be increasing circulating supplies any time soon, like NANO, IOTA, and Cardano. Other tokens which include Bitcoin, Bitcoin Cash, Litecoin, and Monero, have supply inflation rates over 2.5% this year, making them particularly unsuitable.

People may switch to a cryptocurrency with a predetermined generation algorithm, which guarantees certainty of issuance. While the price can never be guaranteed, certainty is more favorable than a monetary policy decision being made by a small group of developers.

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