What is Inflation Rate & How to Keep Your Assets?

What is Inflation: Definition

Inflation is the process whereby the prices of goods and services increase and the purchasing power of money decreases. In other words, when the same amount of money can eventually buy less than before. The causes of inflation can be different: for example, an increase in the cost of production, an increase in demand for goods, or an excessive amount of money in circulation. As a result, people have to pay more for the same goods and services, which can negatively affect their standard of living.

How is Inflation Calculated?

Inflation is calculated using special indices that measure the change in the economy’s prices of goods and services. One of the most common indexes is the Consumer Price Index (CPI). Here’s how it works step by step:

1. Choosing a basic set of goods and services: Economists create a “consumer basket” that includes everyday goods and services such as food, housing, transportation, clothing, and medical services.
2. Price tracking: Prices of goods and services from this basket are regularly recorded in different regions of the country.
3. Price comparison: Prices for the current period are compared with prices for a base period (usually the previous year).
4. CPI calculation: The percentage change in the cost of the basket is calculated—this is inflation.

What is Deflation?

Deflation is the opposite process of inflation, in which the general price level of goods and services decreases while the purchasing power of money increases. Over time, more goods or services can be bought with the same amount of money.

The causes of deflation can vary, such as a decrease in demand for goods and services, a drop in the cost of production, or an increase in the supply of goods when the economy stagnates. While lower prices may seem positive, prolonged deflation can harm the economy. It can lead to reduced corporate profits, lower wages, increased unemployment, and stagnant economic growth as people and businesses put off purchases in anticipation of further price drops.

How Crypto and Inflation are Related?

Inflation and cryptocurrencies are linked through their approach to managing the money supply: traditional currencies are prone to inflation due to unlimited issuance by central banks, whereas many cryptocurrencies, such as bitcoin, have a limited supply, making them attractive for protecting assets from depreciation. In high inflation environments, people often switch to cryptocurrencies to preserve purchasing power, which can act as a hedge against inflationary risks in the fiat economy.

However, it is worth noting that not all cryptocurrencies have a hard limit on issuance. Some projects, such as stablecoins or altcoins with flexible economic models, can similarly “print” tokens, which in theory could lead to inflation similar to fiat money. In contrast, Bitcoin has a limited issuance of 21 million coins, built into its code. Moreover, every four years there is a halving, an event in which the reward for mining is halved. This reduces the number of new bitcoins entering circulation, making it less susceptible to inflation and an even more scarce asset.

Fiat and Crypto Inflation: Difference & Connection

Fiat and cryptocurrency inflation differ in their nature and mechanisms of occurrence. Fiat inflation occurs when central banks increase the money supply, often to stimulate the economy, resulting in currency depreciation and higher prices for goods and services. This process is managed by government agencies and subject to political decisions, making it less predictable. At the same time, blockchain technology and its algorithms protect cryptocurrency from third-party interference.

*Fiat currency is a legal tender whose value is not backed by physical assets like gold or silver, but is enshrined in law.

On the other hand, cryptocurrency inflation is strictly regulated by algorithms, as in Bitcoin. With some cryptocurrencies, like Ethereum (ETH), which switched to Proof-of-Stake before it switched to Proof-of-Stake, inflation manifests itself through the constant issuance of new tokens, but without the intervention of central authorities.

The connection between the two is that during times of high fiat inflation, investors may seek protection in supply-constrained cryptocurrencies such as Bitcoin, seeing them as a means of preserving value and hedging the risks of traditional currencies depreciating. The price of BTC is rising as investors seek inflation protection, using Bitcoin to preserve value and hedge the risks of fiat currency depreciation.

Inflationary Cryptocurrencies

An inflationary cryptocurrency is one that is not limited in issuance, and new tokens continue to be issued. Unlike deflationary cryptocurrencies, such as Bitcoin, which has a fixed maximum supply of 21 million coins, inflationary cryptocurrencies are created to maintain or increase the total supply of tokens, which can dilute their value.

Ethereum, before transitioning to the Proof-of-Stake consensus mechanism, is an example of an inflationary cryptocurrency. Previously, there was no limit on the number of ethers that could be issued, meaning that the number of coins in circulation constantly increased. However, after the network update and introduction of a mechanism to burn some commissions in the EIP-1559 update, inflation on the Ethereum network began to decrease, balancing inflationary and deflationary factors.

The main purpose of inflationary cryptocurrencies is to maintain incentives for network participants, such as miners or validators, and to promote ecosystem development by circulating new coins.

Deflationary Crypto

Deflationary cryptocurrencies are cryptocurrencies whose quantity in circulation decreases or remains limited over time, increasing their purchasing power. Such systems have a mechanism whereby no new coins are issued or their quantity is strictly limited, and existing coins can be destroyed (burned) to reduce the overall supply.

An example of a deflationary cryptocurrency is Bitcoin, which has a fixed limit of 21 million coins. When the last bitcoin is mined, no more new coins will be produced, making bitcoin a deflationary asset in the long run. Each halving reduces the number of new coins, which also reduces the inflation rate of the network.

The Impact of Inflation on Bitcoin Price

Inflation can positively impact the bitcoin price as investors seek protection against the depreciation of fiat currencies. With its limited supply of 21 million coins, Bitcoin is seen as a savings vehicle that can retain value in the face of rising inflation. During periods of high inflation, the demand for bitcoin often increases, contributing to its price.

The Role of Crypto during Inflation and Deflation

During inflation, cryptocurrencies, especially those with limited supply, such as bitcoin, play the role of an asset in preserving value. Investors see them as a hedge against the depreciation of fiat currencies as inflation reduces the purchasing power of traditional money. The ROI from investing in cryptocurrencies can be significant as they provide an alternative and hedge against rising prices.

During deflation, when prices of goods and services fall, cryptocurrencies may be less attractive as a means of saving, as people tend to delay spending in anticipation of further price drops. However, deflationary cryptocurrencies, such as bitcoin, can maintain or even increase in value due to limited supply and demand for them as an asset protected from external economic factors.

Methods of Fighting Inflation

Inflation decreases the purchasing power of money, so it is important to protect your savings. There are several ways to fight inflation, including bank deposits, deposits in precious metals, foreign currencies, securities, and the ability to invest in cryptocurrency. Let’s look at the main methods in more detail.

Bank Deposit

One of the traditional ways to protect your savings from inflation is to place them in a bank deposit. Although interest rates may be lower than inflation, deposits provide stability and guarantee the safety of your funds.

Crypto Lending

Advanced exchanges such as WhiteBIT offer a simple but effective tool for generating passive income in cryptocurrency. Crypto Lending earns profits from loaned all crypto coins. You can choose one of the plans, depending on the rate, terms, and deposit amount.

Cryptocurrency

Thanks to their limited supply, cryptocurrencies, such as bitcoin, can serve as a hedge against inflation. Their decentralized nature and growing demand in the face of fiat currency inflation make cryptocurrencies an attractive option for long-term investments.

Foreign Currencies and Stablecoins

Investing in stable foreign currencies, such as the U.S. dollar or euro, can help protect savings during periods of local currency inflation. Stablecoins pegged to fiat currencies serve a similar function, allowing investors to preserve the value of assets in digital form. Strong currencies are often less susceptible to depreciation, making them attractive for capital preservation.

Investment in Precious Metals

Gold and other precious metals have traditionally been considered a “safe haven” during economic instability. Their value has historically been preserved or even increased during inflation, making such assets an effective protection tool.

Securities

Stocks and bonds, especially those companies that can pass on costs to consumers, can generate income in an inflationary environment. Investing in securities allows you to earn dividends or interest, which helps offset inflationary losses.

Conclusions

With rising inflation, cryptocurrencies are becoming reliable tools for storing value. Their decentralized nature and limited supply make them an attractive alternative to fiat currencies, which are prone to depreciation. The crypto market continues to attract investors’ attention, offering tools to protect capital amid the instability of traditional financial systems and rising inflation.