Bitcoin as a safe haven for Hyperinflation

Picture: Imelda / Unsplash

Did you know, the real value of money keeps diminishing every year? Real value refers to the number of goods and services you can purchase for a given sum of money. Every year, the amount of money you pay for the same quantity of goods increases. This phenomenon is termed the Inflationary tendency of the economy. The new federal policies and fiscal regulations are devised to maintain a healthy rate of inflation on a periodic basis. Inflation is an outcome of the printing currency notes by the central bank. The higher the number of currency notes that is circulating in the economy, the lower will be its value. Developed countries tend to have a lower inflation rate. Whereas emerging market economies tend to have a higher rate of inflation in comparison.

What is Hyperinflation

Hyperinflation is an economic concept which occurs when the inflation rates in an economy are extremely high. As per some economists, hyperinflation occurs when the inflation rate exceeds over 50% in a month or it exceeds 100% in a period of three years or less. What this means is that an economy faces inflation if the cost of goods and services increases at an exponential rate within a short period of time. Although this might sound like a hypothetical scenario, many countries have witnessed the aftermath of hyperinflation. Countries like Zimbabwe and Venezuela are current victims of such a situation. In 2016, Venezuela reported an inflation rate of 481 times and a negative growth rate of -8%. What used to cost 1,800 bolivars reached up to 75000 bolivars within a span of 12 months.

Cryptocurrencies and Hyperinflation

Now, imagine a world where the value of your currency keeps increasing every month. This does not mean you can buy more stuff. It simply means you will end up paying more money for the same product or service. Doesn’t that make you feel like your money has lost its value? This is exactly what happened in the Latin American countries and the African economies. This happened because the regulatory system of these economies failed miserably and did not create value within the economy. The government printed currency notes of higher denominations in a bid to control inflation. Zimbabwe had printed currency notes of one trillion Zimbabwean dollars. This seems absurd. The demand for alternative currencies has increased because of the disastrous economic situation. Since the USD is considered as the world reserve currency, the US dollar was substituted for some time in Zimbabwe. But this practice cannot continue indefinitely. This is the point where cryptocurrencies can turn into a haven.

 

Credit: Marianian/Creative Commons

 

How Cryptocurrencies can safeguard against Hyperinflation

The global monetary system is extremely fragile. This is evident from the systematic ups and downs of the global financial markets. The value of currency notes printed by the government depends solely on the guarantee of repayment by the central bank of the country. But, if the government collapses, the currency loses its value completely. It doesn’t matter how large the denomination of a note is. This proves without a doubt that the fiat money (or legal money regulated by the government) has no real intrinsic value attached to it. In fact, the currency system keeps functioning owing to good faith and the amount of credit in the economy. Too many notes in circulation can negatively impact the credibility of the economy.

Does adopting the cryptocurrency change the economic scenario of a country? This can be inferred by the Zimbabwean economy. The demand for Bitcoin in the country has increased considerably. Since the legal tender has lost its value, people are turning towards Bitcoin as an alternate measure of value. Bitcoin is based on Blockchain technology. One of the most secure platforms in the world. Golix is one of the common cryptocurrency exchanges in Zimbabwe. This exchange facilitates the purchase and sale of cryptocurrencies.

There are many benefits to adopting a financial system based on a virtual currency. Some of the advantages are

  1. The existing financial system is heavily reliant on the trust and credibility placed on the central bank. Owing to the centralized nature of the financial system, the value of a currency solely rests with the handful of bureaucratic elites. The policy decisions taken by these few determine the economic scenario of the country. Unlike the fiat money, Virtual currencies do not depend on the centralized system. Introducing cryptocurrencies can eliminate this need for dependency. The supply of cryptocurrencies is coded in the smart contracts of the network system. The process is completely transparent. This makes it possible for the user to keep a watch on the amount of money that has been mined.
  2. In most cases, the supply of the virtual currency cannot exceed the hard cap. This limit is specified in the code for most of the currencies, like Bitcoin. Even if the owner decides to make any changes to these limits, it must be validated by most of the participants. In other words, the supply of virtual currencies is fixed in the initial phases. But it can be altered in the future based on market response.
  3. Although the crypto rates keep fluctuating, the virtual currencies can be much more predictable than fiat currency. Central Banks usually design their monetary policies based on their forecasts. But central banks in many countries have exhibited the inability to make accurate forecasts. Growth rates and money supply predictions have gone for a toss quite often. But the same is not applicable for cryptocurrencies. In the case of the cryptocurrency, it is possible to accurately estimate the demand and supply based on mining data. This gives a much fairer picture to both producers and consumers.
  4. Cryptocurrency can be extremely useful for entering into peer to peer transactions. These peer to peer transactions are not restricted to country demographics. Even international transfers and cross-border remittances can be done with the help of digital currencies. For instance, during the Zimbabwean crisis, Bitcoin was used for remitting funds across the border.

There are numerous ways in which Bitcoin and other alternative cryptocurrencies can help in stabilizing economic turmoil. In most instances, people feel a risk factor in virtual currencies owing the limitations of regulatory oversights. But when compared to the Latin American and African countries, it seems that the lack of oversight is exactly the feature which makes a cryptocurrency much more effective.

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