By simple definition, inflation is an increase in the price level of a selected basket of goods and services produced in an economy. The inflation rate is a concept that measures the percentage change in the prices over a certain period of time. Inflation impacts the purchasing power of a nation’s currency, higher inflation means a decrease in purchasing power. Rising prices affect the cost of living, the cost of financing, and the cost of doing business in a particular country. Some countries are battling with hyperinflation, Venezuela ranked number 1 with a skyrocketing inflation rate of 19,906% in 2019, according to the latest data released by Statista. Zimbabwe came at the second spot with an inflation rate of 255%. Argentina ranked third with a 53% inflation rate. A higher inflation rate had a negative impact on their respective currencies. The Venezuelan Bolivar depreciated more than 1000% in less than a year against the US dollar. Argentinian Peso depreciated around 50% in the last 1 year.
Hyperinflation and a weak national currency opens the door for digital innovation, and what’s better than the cryptocurrencies? For all those people who don’t know what crypto is all about, it all started with a research paper in 2008 when Satoshi Nakamoto published a paper with the title “Bitcoin: A Peer-to-Peer Electronic Cash System”. Nakamoto developed Bitcoin as a peer-to-peer version of electronic cash to allow payments to be sent from one party to another without the involvement of a third party. Bitcoin, also known as the “Digital Gold” gained popularity with the time and many cryptocurrencies emerged after Bitcoin with specific purpose and usability. Ethereum, Tether, XRP, and Bitcoin Cash to name a few. As of writing, the overall market cap of cryptocurrencies stands at around $310 billion. One Bitcoin is now worth more than $10,000 as the market cap of Bitcoin alone is around $200 billion.
So, the question here is that what’s the relation between inflation and cryptocurrencies? Well, inflation is helping crypto adoption significantly. (John Boyd, Ross Levine & Bruce Smith 2001) published a research paper in 2001 with the title of “The Impact of Inflation on the Financial Sector” and discovered that the inflation rate of above 15% caused a significant drop in financial sector performance and pushed investors to find other investment alternatives. Back then, there were only two options for those investors, Gold and the US Dollar (also known as safe-haven assets), but now the popularity of Bitcoin and other crypto assets is causing a rapid adoption of cryptocurrencies in the countries suffering from high inflation rate.
Venezuela’s national currency, the Venezuelan Bolivar depreciated by more than 1000% against the US Dollar in less than a year. The inflation rate in the country is skyrocketing and that helped non-traditional investment tools to take center stage. Crypto adoption in Venezuela is booming, according to the latest report, there are more than 20,000 businesses in Venezuela accepting crypto as a mode of payment including a Burger King branch in the capital city of Caracas. Hyperinflation makes it difficult for local shops and merchants to store Venezuelan Bolivar, thus making cryptocurrencies a much more stable medium of exchange. Data from LocalBitcoins, a peer-to-peer bitcoin marketplace shows that the trading volume of Bitcoin in Venezuela touched an all-time high in July 2020.
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Argentina suffered from a high inflation rate of 53%, weak economic policies, political turmoil, and debt default accelerated the currency depreciation. Argentinian Peso, the national currency of the South American nation lost more than 50% of its value in 1 year. Weak Peso helping crypto adoption in the country. Bueno Aires, the capital of Argentina and the most visited city in South America is not just another tourist hotspot, it’s gradually becoming the Bitcoin hotspot as more than 100 merchants in Bueno Aires now accept Bitcoin. There are 11 Bitcoin ATMs in the city. Bitcoin trading volume in Argentina reached a record high this month.
Inflation played a major role in crypto adoption, most of the countries suffering from rapid inflation reported higher trading volumes in Bitcoin and other cryptocurrencies. Depreciation of national currency encouraged investors and even small businesses to store value in crypto assets in order to hedge against the devaluation of local currency. The growing popularity of crypto assets during these difficult times shows a roadmap to even greater adoption in the future.
Bilal Jafar is Co-Founder and Editor-in-Chief at Reefew