Can Crypto Really Beat Inflation?

Crypto has been vaunted variously as an inflation-proof asset and a digital answer to gold. But just how accurate are these descriptions? With inflation on the rise, the answer could well be around the corner.

The Problem of Inflation

Everyone with fiat savings fears the dreaded “i” word. But after years of low or almost no inflation in many parts of the world, it suddenly seems we cannot escape talk of a coming inflationary storm.

Much of the economic talk in 2021 centered on inflationary hotspots in Turkey, Argentina, Venezuela and the like.

Source: https://dolartoday.com/indicadores/; http://www.bcv.org.ve/estadisticas/tipo-de-cambio
Graphic: Nicolas Perrault III

But while these were once seen as outliers, nations that have been living without inflation for decades are now posting worrying figures. In countries like the UK and the United States, central banks are now finding themselves under increasing pressure to raise interest rates to fight back.

However, the problem cannot be so easily swept under the carpet. Wages in the West are on the rise, food prices are shooting up worldwide and energy price hikes are becoming commonplace.

If inflation is now a given, it is only logical to expect fiat currency holders to respond. Pressures like these naturally push investors toward “safe assets” – traditionally blue-chip stocks and gold. But more recently, the “safe asset” category has a new member: crypto.

Does Crypto Work as a Store of Value?

Many major economists say they think so, with some calling Bitcoin and the like “digital gold.”

One notable example is the Visa CEO Alfred Kelly, who last year said: “We see all [cryptoassets] as digital gold. They are predominantly held as assets that are not used as a form of payment in a significant way at this point.”

Just as gold or “safe-bet” stocks often experience price volatility, they are simply too valuable to bottom out. They are also a safe distance from currency markets, meaning that they might get dragged into periods of fiat-related volatility, but can never (or so the theory goes) experience the same kind of hyperinflationary pressures that can cause a currency to collapse, à la Germany in the 1920s.

While the Turkish Lira and the Argentine Peso are not quite at the same level, they too are edging ever closer to inescapable currency chaos.

In both nations, crypto adoption is flying up. Turks make a million crypto transactions a day, Reuters reported last month. In Argentina, even the President has called crypto a “hard currency, somewhat,” with the power to “nullify inflation.”

Bitcoin prices over the past five years

Is There Really Any Truth to All This?

This month, Rio de Janeiro’s Mayor said that he intends for the Brazilian city to keep 1% of its treasury reserves in crypto. Other cities have taken a similar tack, while there is now no shortage of mainstream financial advisors speaking to media outlets like CNBC and Time about the benefits of buying crypto. Most now advise investors to keep at least a small portion of crypto (10% or less, mostly) in their portfolios.

It looks like global politicians are starting to take this advice to heart.

Could Crypto Actually Replace Fiat?

Most critics think that crypto’s weak point is its use as a form of payment. Visa’s Kelly is just one of those who have pointed out that people seem happy to buy, trade and hold crypto, but seem unwilling to spend their coins on goods or services.

High gas fees, slow and transaction prices are often cited as prohibitive factors, while crypto pay incentives have thus far failed to blossom. But micro-payment-friendly solutions have been mooted, including the Bitcoin Lightning Network, which has been championed by the Bitcoin-keen government of El Salvador’s President Nayib Bukele.

Bukele’s government last year adopted BTC as legal tender, and has since snapped up hundreds of tokens using public funds. That means that crypto is now being put to the test in the Central American nation as not only as a treasury reserve asset (a store of value), but also as a means of payment.

As these are perhaps the two key properties an asset needs to possess if aspires to be called a currency, perhaps we will find out very soon if crypto really has what it takes to go toe-to-toe with fiat!