How do cryptocurrencies fight inflation?

Especially from the massive adoption of cryptocurrencies in Latam, the correlation that these tokens have with inflation is an important topic about which there is much to know. Is it true that cryptocurrencies fight inflation?

Simply defined, inflation is the loss in value of a currency as opposed to the increase in the price of goods, services, and consumer items . In other words, the loss of money value is the result of more money in circulation than necessary.

The most recent experience with inflation at a global level was that projected in 2020 as a result of the global pandemic crisis, in which many countries were forced to inject trillions of dollars in order to stimulate the movement of the economy. Contrary to projections, headline inflation remained stable.

Contrary to popular belief, inflation is not a totally negative effect for a country’s economy, but rather an element of balance that in many cases can boost the economy. Inflation is an element of constant balance, which when it falls, encourages spending, indebtedness and investment, when it rises, goods and services tend to increase their cost rapidly while people’s purchasing power stagnates.

Since inflation is an element of constant fluctuation, saving in current or fiat currencies usually implies a risk of possible loss of value, this fact motivates many people to decide to invest their money and save in goods such as gold, which usually keep their value despite inflation fluctuations in all parts of the world.

For several years, the same reason that makes gold a material asset with which to protect against inflation, has led cryptocurrencies to be an even more popular alternative to gold. gold to hedge against inflation.

The principle by which cryptocurrencies are an important resource to hedge against inflation is the same. The best example is Bitcoin which is known as an asset deflationary that is also based on being decentralized and limited to 21 million. Decentralization and the limit on its offer are the reason why it represents an attractive resource for inflation-proof investment.

Unlike any fiat currency, the value of cryptocurrencies such as Bitcoin or Ethereum gradually increases over the years. This principle is the same that all cryptocurrencies follow, and for which the massive adoption of cryptocurrencies in Latin America stands out from other parts of the world.

One of the factors that have limited the adoption of cryptocurrencies in a massive way, are the wide fluctuations that they usually present in short periods of time. Like the 45% drop in Bitcoin in May 2021, which meant an exodus of many investors back to gold, considering that the cryptocurrency market is still in a stage with little guarantee to ensure the value of investments.

On the other hand, in many Latam countries, the inflation levels of certain currencies grow to such a large degree, that they are considered “hyperinflation”. In cases like Venezuela or Argentina, the adoption of crypto assets on the local currency and even the US dollar, are usually considered a more effective means to preserve the purchasing power of people.

Not only bitcoin and ethereum, particularly in Latam, the cryptocurrency market is rapidly populating alternatives to invest that represent a resource of great value to preserve people’s purchasing power. Although the relationship of Cryptocurrencies against inflation is a complex issue, the contribution of decentralized finance to the Latin American economy is obvious.