With the recent rise in popularity of cryptocurrencies, there are many different opinions about the future. While the value is still volatile, there are many that believe that it will be the future of money.
2021 saw the continuing rise in cryptocurrencies being mentioned as a popular investment choice. But did you know that cryptocurrency can solve one of the most persistent macroeconomic issues that the world has ever faced? — Hyperinflation.
This article explores how cryptocurrency can provide a better alternative to fiat currencies, especially in a state of hyperinflation.
What is Hyperinflation?
Inflation is marked by a process called “quantitative easing” which simply means the excessive printing of money by the government over a long period of time. This causes an increase in monetary supply and thus, lowers the purchasing power of the money. Hyperinflation is characterized by low value or valueless fiat currency.
It has devastating ripple effects on the economic and social parameters of the country. An increase in the supply of money causes prices of goods and services to skyrocket by over 50% per month. This causes people to hoard and stockpile perishables and essential goods causing a breakdown of the entire economy and perpetuating wealth inequality.
Hyperinflation is experienced in 40% of the US dollars in circulation as of 2022 came into existence after 2020. Further, history is ripe with incidents of hyperinflation in developing and poor countries such as Venezuela, Lebanon, South Sudan, and Nigeria.
Why Does Hyperinflation Occur?
For the most part, hyperinflation occurs due to the inherent characteristic of fiat money being oversupplied. This feature is exacerbated by the involvement of centralized banks, especially in conjunction with political factors, which motivates these monetary institutions to print money to pay for their spending at will.
Hence, regulation of the supply of fiat money must be backed by principles of independence, accountability, and oversight. Most nations lack these mechanisms and that can lead to an uncontrolled supply of money, thus causing massive economic breakdown.
In the aftermath of the COVID-19 Pandemic, inflation in all countries has peaked to record high — close to the levels in the 1980s that witnessed one of the worst recessions of all time.
Is Cryptocurrency The Solution?
Countries that face the wrath of hyperinflation are adopting cryptocurrencies, like Bitcoin, as their legal tender because their supply cannot be increased at will, unlike fiat currency. Cryptocurrency is decentralized by nature which makes it immune to political or monetary interventions.
Further, they provide an alternative to international settlement networks whose value is free of political-institutional meddling. Cryptocurrencies use open ledger technology to allow for the transparency of all transactions. Moreover, the market is seeing the rise in crypto wallets such as Coinovy to simplify and improve people’s access to financial services and allow Crypto to Fiat (C2F) transactions to be done instantaneously.
Most major cryptocurrencies like Bitcoin and Ether, which hold a limited supply of 21 million units and 18 million units respectively, can be mined till the limit is reached and then, the supply will not and cannot be increased. Such cryptocurrencies cannot be expanded on a political whim. Rather, it would require the consensus of a decentralized network that typically spans across millions of users — democracy in its finest form?
Moreover, new kinds of cryptocurrency such as Stablecoins have emerged whose market value is pegged to the value of a certain asset.
Most fiat currencies are volatile, however, relatively stronger fiat currencies such as Dollar and Euros are generally susceptible to lower rates of inflation and countries which are developing and underdeveloped tend to have currencies that are extremely inflation-affected.
Countries like Venezuela, South Sudan and a few countries in Africa that are prone to hyperinflation, cannot save money or build wealth. People in these setups may find it difficult to exchange their money for dollars or euros. Stablecoins are one of the less risky and “stable” cryptocurrencies, as the name suggests, through which people can grow their wealth by using digital wallets like Coinovy which let people buy, sell and trade cryptocurrencies no matter which corner of the world they are from!
Hyperinflation is a dangerous situation that can occur when the supply of money is not increased in line with economic growth. When hyperinflation occurs, the currency can become worthless, which would mean that prices would simply rise without end. In countries like Venezuela, hyperinflation is causing severe problems.
Perhaps, cryptocurrencies are the way forward for such economically distressed countries.
All in all, economically-distressed societies across the world can find utility in cryptocurrency to save them from the clutches of hyperinflation and its deadly effects.