Inflation in Western countries has reached the highest levels in the past 30-40 years. In June, consumer prices in the United States increased by 9.1% year-on-year, while core inflation (the increase in prices for goods and services excluding food and energy) was 5.9%, which was the highest since 1981, writes RBC Crypto.
According to the April forecast of the International Monetary Fund (IMF), by the end of 2022, inflation in developed countries will reach 5.7%, and in developing countries — 8.7%. In Russia, according to the Central Bank’s forecast, inflation for 2022 will be 12-15%, and for 2023 — 5-7%. But in some states it will be several times higher. For example, in Turkey in July, consumer prices increased by 79.6% year-on-year.
Supporters of cryptocurrencies call one of their advantages such a characteristic as deflation. Assets such as bitcoin have no inflation risks, since the issue is strictly limited. In this regard, some cryptocurrencies are credited with the property of protecting capital from inflation of fiat currencies. However, the opinions of the interviewed experts on this topic differed.
The cryptocurrency market is closely linked to the rate of the first cryptocurrency, and bitcoin itself has a limited issue of 21 million coins, says a senior analyst Bestchange.ru Nikita Zuborev. He recalled that for this reason, in theory, cryptocurrencies can be considered as a deflationary asset, since the cause of inflation — a constant increase in the money supply — is excluded.
But in practice, everything is much more complicated than considering assets “in a vacuum,” the expert warned. The value of cryptocurrencies, as well as any public money, directly depends on investors’ faith in these currencies and related assets, Zuborev explained. In his opinion, without a strong and well-established “foundation” in the history of cryptocurrencies, their exchange rate to fiat money cannot remain stable.
In the long term, global inflation affects cryptocurrencies positively, Zuborev believes. He clarified that the reputation of cryptocurrencies remains stable, unlike the reputation of world currencies associated with the infinitely inflating public debts of most countries.
But in the short term, situations such as the current increase in inflation have a negative impact on cryptocurrencies, the expert added. At these moments, investors transfer capital into government bonds and precious metals, and in the conditions of money outflow, prices for most of the once promising assets are noticeably falling, the analyst states.
“While it is impossible to buy bread with the help of cryptocurrencies, they mostly remain something like unprivileged shares in their functions – an exclusively speculative asset with high volatility,” Zuborev is sure.
The director for the development of the TradingView platform in Russia, Vitaly Kirpichev, agreed with him. He clarified that the increase in consumer prices is usually accompanied by an increase in interest rates of central banks, and this in turn reduces the amount of speculative capital in the markets. The smaller it is, the greater the probability of a downtrend across the entire spectrum of cryptocurrencies, the expert is sure.
“It is important to understand that cryptocurrencies are a very volatile type of assets, so they attract mainly speculative capital. This is a great tool for active traders, but it is quite dangerous for a conservative investor,” Kirpichev believes.
Change of mood
Chen Limin, the Financial Director and head of the ICB Fund’s Trading Operations department, has a different opinion. He believes that the impact of inflation on the cryptocurrency exchange rate is a myth. According to the expert, to make sure of this, it is enough to look at the dynamics of the market.
Limin recalled how from March to November 2020, bitcoin grew by 1.1 thousand percent. At the same time, other risky assets were also growing — for example, the unprofitable company HubSpot, which develops software for business, rose in price by 850%.
According to Limin, this dynamic is a consequence not so much of the quality of assets, but of the changed attitude of society to risky instruments. Central banks also contributed to this growth, he continues: at that time, regulators allowed investors to attract cheap financing for risky operations. And later, a change in the mood of the community and regulators in the opposite direction also led to a deep correction, in which both stocks and cryptocurrency are now located, the expert is sure.
Cryptocurrency as protection
It will be short-sighted to turn to cryptocurrencies as a short-term tool to protect capital at times of high uncertainty in the market, the senior analyst is sure Bestchange.ru . But if we evaluate cryptocurrencies on larger planning horizons — from 5 years or more, then with a high degree of probability the value of these assets will grow enough to cover global inflation, Zuborev says.
According to him, it is difficult to predict what can happen to cryptocurrencies over such a long period. The analyst suggested that the scenario of a complete compromise of this asset class with their almost complete depreciation cannot be ruled out.
It is not uncommon for people to try to protect themselves from inflation or circumvent currency restrictions, said Chen Limin, Financial director and head of the ICB Fund’s trading operations department. He cited the example of Argentina, which has been in a state of financial crisis and high inflation for a long time, and where the official exchange rate of the peso to the dollar is much lower than the unofficial one (about 130 pesos per dollar and 230 pesos per dollar, respectively).
That is why stablecoins are in use in Argentina, the expert says. But in his opinion, this is not enough to have a positive effect on asset prices. In order for the cryptocurrency to grow, institutional investors must massively acquire it on the market, the expert concluded.