How Cryptocurrencies Can Be Used to Fight Inflation

For an economy to thrive, the inflation rate must be around 2%, according to most economists.

If inflation is too low, we risk a sluggish economy and weak wage growth, while if it is too high, people’s savings and purchasing power shrink.

Right now we face the latter scenario, with inflation sitting at an astonishing 8.6% in the United States, the highest rate in four decades.

Globally, inflation is now climbing into almost everyone’s alley. The question that everyone asks is: how to protect their purchasing power in the face of a rapid rise in prices?

A real inflation gauge

The first step is to understand what the rate of inflation really is. The way inflation is calculated has not changed for over 100 years and so there are a number of gaps and inaccuracies.

As such, we need to radically rethink how we collect and collate data. Inflation in the United States is much closer to 11%, according to the Truflation Index, a blockchain-based inflation data aggregator.

That extra 2% makes a huge difference in the lives of average Americans. With basic groceries now costing hundreds of dollars each visit to the supermarket, people are already cutting services beyond their basic needs.

At some point, the average consumer will be forced to choose between energy and groceries, or transportation and new shoes. At that point, the economy will start to suffer.

How an accommodative monetary policy affects inflation

The founders of cryptocurrencies have long had their eyes on inflation.

The first “genesis” block of the Bitcoin blockchain contains code that references an article by The temperature in 2009, which told how George Osborne, then Chancellor of the Exchequer, planned to issue a second £1 billion ($1.19 billion) bailout for banks during the financial crisis.

Satoshi Nakamoto, the anonymous creator of Bitcoin, understood that the massive printing of money by central banks in 2008 and 2009 would create a dangerous inflationary environment.

This was before the Covid-19 pandemic, which pushed money printing to heights no one could have imagined.

Since January 2020, the US Federal Reserve has added $5 trillion to its balance sheet as part of its monetary stimulus plan. This is in addition to the $4 billion accumulated largely between 2008 and 2020. (A fully accurate figure is not available because the Fed stopped publishing its balance sheet on its website in 2020).

One wonders now if this huge level of borrowing can ever be recovered and what damage it could cause to the economy and to citizens.

The slight rate increases over the past few weeks that have driven markets into bearish territory could just be the start of what the Fed should do if it plans to balance the books.

A call for industrial collaboration

Cryptocurrencies are currently experiencing one of the steepest downturns the industry has ever seen, largely due to rising inflation and interest rate hikes that have spooked investors used to easy money.

The recent TerraUSD explosion also didn’t help, with the loss of $60 billion almost overnight, making “algorithmic stablecoins” a dirty word.

However, such innovations have a vital role to play in a cryptocurrency ecosystem that could beat inflation.

While fiat-backed stablecoins have proven a lifeline during recent bouts of volatility, a truly decentralized stablecoin that can provide a steady and consistent return in a safe and stable way – that matches or maybe even beats the inflation – is the holy grail of everyone in this industry should pursue.

The more volatile cryptocurrencies will always appeal to risk-hungry investors, but for the rest of the world, we need something a little less risky.

We need something similar to what cash savings used to do and help the average person preserve the value of their money.

If the cryptocurrency industry works together in this bear market, we can make it happen.

Stefan Rust is the founder of Laguna Labs, a blockchain development house, and former CEO of bitcoin.com

Updated: July 12, 2022, 05:09

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