Does Cryptocurrencies Cause Inflation?
As the civilization moving towards the age of Society 5.0, people are working to reach the integration between human-centered society and technology. Development in actualization of big data and artificial intelligence are happening and the myth that people can interact to each other in a virtual universe are slowly coming true. One of the innovation that involve in this “ride” to Society 5.0 is the use of cryptocurrencies as, some crypto-optimistic expert says, is the not a bubble and an attracting talent. Besides, there are still many optimistic people out there who believes that cryptocurrency is not a kind of ambiguous investment, instead as the answer of future economics (analyst estimates that the global cryptocurrency market will more than triple in 2030). But did the maturing cryptocurrency can causes inflation to our economics?
First thing first, what is an inflation?
Inflation is a condition where there is a general increase in price level that causes decrease in purchasing power. There are many factors that can cause an inflation. First, an incrase in money supply, cost-push inflation (increasing price of production factor), demand-pull inflation (increasing demand of goods), imported inflation, etc. Like i just wrote before, that an increase in demand and increase in money supply can cause inflation, for the volume of money circulation goes higher, and in the end, people can save money as much as they can.
Is Inflation Important to Cryptocurrencies? Inflation negatively affects the value of fiat money, the money that people place in saving accounts are losing value overt time. Losing value of fiat money leads investors to invest in digital currencies (cryptos like bitcoin or ethereum are the alternative for investor to ‘save’ themselve from losing money because of inflation). There are features in a cryptocurrencies that may help it to resist inflation: Cryptos can’t be manipulated by government and like gold and other scarce stores of value, that the price of cryptos can rise in an uncertain amounts of time.
Similar to gold, technically, cryptocurrency experiences inflation as the purchasing power rises. But, the inflation in cryptocurrency is not a major factor that investor considers compared to fiat money inflation. Note that not all cryptocurrency designed like bitcoin, there are cryptos that tied to fiat money such as stablecoin. So, the money invested in stable coin are affected by the inflation rate. It might loses value over time as their reserves currency loses value.
British economist, Bernard Connolly writes an article that show the frightening possible future of crypto, especially bitcoin. In his article, he wrote that in the long term, bitcoin could causes hyperinflation and social-economics destruction. He consider that the price of bitcoin is in a bubble. He propose two possibilities whether the price of bitcoin appreciate to infinity or it won’t. If it won’t, there will be downward trend in the price of bitcoin. If the price of bitcoin appreciate into infinity, bitcoin could be an asset that can exhaust all the world’s productive potential. Thus could lead to a conflict among the holders to gain more and more bitcoin. Connolly called for the government intervention to prevent a crash that could produce hyperinflation.
If i conclude all the sources i’ve found all around the internet, cryptocurrencies can inflate, theoretically their movement are similar to fiat money. The price of cryptocurrencies can increase as the purchasing power of the society itself increases. But, since cryptocurrencies are not the main currency we use in our economy, it doesn’t become a important factor that needs our 100% attention. I kinda agree with Connolly’s opinion in his article, because, i still don’t know that if people’s purchasing power of bitcoin keeps increasing, will the price of bitcoin goes to infinity?? Therefore, government needs to keep watching on bitcoin and other cryptocurrency stuffs. In other words, i am not 100% optimist about cryptocurrency, but since we walk towards a digitalistic future (when metaverse may become real), we must consider that cryptocurrencies might became part of our economy.
If Bernard Connolly was right. If bitcoin price is in a bubble, what if the bubble never burst?