Report 'How inflation affects The Crypto Market' by Altal at 04 May 2022

How inflation affects The Crypto Market Source

Having written on the subject of inflation and its effects previously, I would like to add some perspectives on how inflation affects the crypto currency market. Inflation basically is the rise of consumer goods and service price resulting in the devaluation of a currency. In the previous report the causatives and effects were outlined and won’t go over them here again. The crypto industry has a pillage of challenges right from its conception, which appears to be ever-rising, from security hacks, heavy taxation to intense regulatory scrutiny from government and regulatory agencies just to mention a few and now it is battling inflationary pressures.

Looking into the effects inflation has on these digital assets, two effects stand out; fall in crypto assets demand and need for hedging. First it is observed that in the midst of the growing clamor of inflation the global crypto market suffered a massive 35% shrink in market cap from $2.58 trillion to $1.68 trillion between nov.2021 to April 2022 [1]. This is attributed to decrease in buying power which triggered a survival instinct and fall in consumer spending. Users are left to choose to spend “wisely” on survival than spending on luxury items like digital assets. With digital assets now becoming “luxury items”, new and existing demand for these assets have sharply fallen. Another factor contributing to the falling demand is the rising debt figures as many convert their cryptocurrency into fiats to pay for their debts.

The second aspect triggered by this rising inflation is the search for a safety for cryptocurrencies. While the demand for crypto assets fell due to selloffs, the assets also plunged in value with many suffering double-digits losses. This has awakened investors’ concern to find measures to shield their crypto assets investments and other fiat-based investments from the effects of inflation. this has caused many asking if bitcoin can be a hedge against inflation.

Can crypto be a hedge against inflation? With gold losing the trust of investors as a store of value, cryptocurrencies especially bitcoin is been studied as an inflation hedge. With rarity built into the supply of bitcoin, it has earned the name “digital gold” [2] linking it to been a hedge for money by investors just as gold was. But how well does it hold against inflation? The bitcoin chart over the years shows an upward explosive growth but on a short term, the situation isn’t exactly the same. The huge volatility characteristics of bitcoin price which resulted in a 40% price dip between October 2021-April 2022 [3] surely hurts investors’ funds only revealing that it is fundamentally affected by inflation, thus pointing that on a long term, bitcoin passes as an inflation resistant asset.

Another class of inflation resistant cryptocurrencies is the stablecoins. Stablecoins are vital innovations to the crypto space having provided hedge against the volatility of crypto assets. There are four categories of these and have gained an increasing demand. The total supply for these coins has increased to 181billion as of March 2022 [4]. While the bitcoin market was experiencing a decline the total stablecoins market has was moving in the other direction at 40% [5] increase, inferring that it was gaining market dominance and revealing investors preference of stablecoins over other digital assets. The coins leading the pack include USDT, followed by USDC, BUSD, TerraUSD and DAI.

Having looked into these inflationary data released and the inflationary pressures, it only points that the worst may not be over yet market is expected to tank while inflation is been checked and the market would definitely require some time return to bullish ways. But until then, investors can hedge their assets using bitcoin on long term basis if they can stomach the falling prices or use the stablecoins for the short-term or combination of both depending on their strategy.

Reference

1. Crypto Market Cap and DeFi Market Cap Charts — TradingView
https://www.tradingview.com/markets/cryptocurrencies/global-charts/

2. The Motley Fool- Is Bitcoin a Good Inflation Hedge? https://www.fool.com/investing/2022/01/01/is-bitcoin-a-good-inflation-hedge/

3. Bitcoin price today, BTC to USD live, marketcap and chart | CoinMarketCap
https://coinmarketcap.com/currencies/bitcoin/

4. The Block - Stablecoins Archives
https://www.theblockcrypto.com/data/decentralized-finance/stablecoins

5. Stablecoin market cap 2017-2022 | Statista
https://www.statista.com/statistics/1255835/stablecoin-market-capitalization/

Link: https://www.tradingview.com/markets/cryptocurrencies/global-charts/