The concepts of inflation, recession and crypto have become more and more entwined in today’s shifting global economy. The birth of crypto opened up more options for financial transactions. Still, macroeconomic factors, like inflation and recession, continue to influence the global crypto market. But how do these factors interplay? Is there such a thing as crypto inflation?
In this page, we’ll shed light on crypto inflation and discuss if crypto is a safe haven during recession and inflation. To top it all off, we’ll help you understand each concept and its bases and consequences in the future.
The Butterfly Effect of Inflation
What is inflation?
Before we can explain inflation’s effects, we need to look at what it is. It is an important economic factor that points to the rise in the price of wares and labour. In essence, if things become more expensive, people can’t afford them. For example, if you could buy a loaf of bread for $1.00, inflation may cause the price to rise to $1.10. As a result your money will buy less than before.
When the value of a fiat currency lowers, it has a domino effect on companies and day-to-day life. Inflation data is measured using CPI (consumer price index). When the value of a fiat currency lowers, it has a domino effect on companies and day-to-day life.
It is worth noting that there is a small amount of inflation each year, ranging up to 2%. This is done to maintain stable prices in central banks, but not only. It also increases the national minimum wage to protect workers better. Overall, slight inflation is seen as a good sign for economic growth.
However, inflation can have a negative effect if it reaches above these limits. The Covid pandemic was a recent reason for inflation. The fact that so many people stayed home and didn’t contribute to the economy had an impact. This had a cascading effect on many sectors. Let’s see which areas are the most affected by inflation:
Purchasing Power of Consumers
Consumers like to spend less money with the rise in the cost of products and services. They struggle to afford day-to-day necessities like bills, food, and clothing. This lowers their standard of living. As a whole, inflation decreases their purchasing power.
Savings and Investments
People’s savings accounts and investments are also affected. Over time, monetary inflation can lower the value of fiat currencies and, as a result, hurt people’s investments. Any returns you receive will also be decreased. When making financial plans, people need to carefully take inflation into account.
Interest Rates
When central banks see a change in monetary supply, they raise their interest rates. High rates are bad for the economy and worse for businesses. The higher the rates, the lower the desire to borrow money.
The Vicious Cycle of Recession
What is a recession?
Now that you know how inflation impacts the world, let’s shed some light on recession. A recession is often described as a severe drop in economic activity. But in more detailed terms, this drop needs to happen in two consecutive quarters. In addition, there has to be a reduction of GDP (Gross Domestic Product).
Recession can severely impact society and businesses, not to mention the economy as a whole. If inflation and recession are happening at the same time, it can affect financial market value and consumer behaviour.
Just like inflation, recession can have a poor effect on the economy and lives of people. More notably, it can start an economic decline, which results in many challenges for companies and people. Here’s how it can affect them:
Consumer Spending
People are more careful about how they spend their money during a recession. In fact, they tend to spend as little as possible. This, in turn, worsens the recession and creates an even bigger problem.
Investment Volatility
Recession does have the power to affect investments. This is because investors are already struggling with risk aversion. In fact, a recession can significantly impact investors’ portfolios and the financial markets as a whole.
Employment
As businesses suffer monetary inflation, they may need help to keep all their staff. In turn, they may resort to cost cuts and lay off some of their team. As a result, unemployment increases, and it becomes harder for people to find jobs. Their financial security suffers, and this also hurts the economy.
Crypto Inflation – A Thing of Myth?
Are you wondering whether crypto can experience inflation? Yes, crypto inflation exists. When we talk about crypto inflation in the crypto market, we mean the rise in a crypto assets’ supply. Most crypto coins and tokens have a fixed supply. This sits in contrast to fiat currencies, controlled by central banks, that can be inflated at will.
For instance, Bitcoin has a limited pool of 21 million coins, and the only way to create more is through mining. In order to balance sudden peaks in the creation of more coins by Bitcoin miners, these crypto assets go through halving events every four years.Â
They lower crypto inflation over time. Bitcoin and Ethereum follow these halving rules, and for that, they are known as deflationary cryptocurrencies. As a whole, they are not directly affected by monetary inflation. As you can see, crypto inflation is a whole other story.
Still, not all crypto is Bitcoin. It is worth noting that some coins are affected worse by inflation. For example, stablecoins’ value is set to the US dollar’s. So whenever the US dollar sees price inflation (whether the price rises or lowers), it affects stablecoins.
Is Crypto a Safe Haven for Recession and Inflation?
During recession and inflation, investors try to find ways to protect their money. They tend to turn to new forms of investment. In fact, many traders choose to put their savings into digital assets.
Crypto markets provide an umbrella to weather the storm of inflation. Crypto inflation isn’t the same as monetary inflation. That’s why many traders choose to move their savings from banks into crypto. Here is why:
- They have a limited money supply – unlike fiat currencies, crypto assets are limited in supply. This makes them deflationary. As a result, crypto can be a good inflation hedge option.
- They are decentralised – Unlike fiat money, crypto is not controlled by the government and other major central banks. The digital asset world provides a shield against inflation steps taken by the government.
- They offer investment diversification – Adding new asset classes like crypto to your investment portfolio can help with diversification. That way, if prices fall for one currency, you’ll always have another to keep you afloat. Crypto assets aren’t severely affected by volatility (caused by inflation).
If we take a look at inflation data in the last couple of years, we can see an abnormal price peak. Luckily, inflation rates have dropped since April 2023. Inflation expectations dictate that the current 5% will remain steady. This is the lowest since May 2021.
What About Recession?
What’s great is that all the above perks are valid during times of recession. To top it all off, crypto offers an alternative store of value that some experts compare to gold. It can shield your money during bad times. In addition, you don’t need to worry about the security of your crypto assets. The blockchain records them, and no one can redirect them without your permission.
Where to Safely Buy Crypto
Considering all this, does the idea of dabbling in the crypto market yourself tempt you? Are you looking to enjoy the inflation hedge perks during high inflation times and banking crises?
It’s crucial to buy crypto from legitimate sites and not emerging markets. Sadly, we are not safe in the face of scams and fraud. So here are two recommendations of trusty websites you can try if you want to own Bitcoin and other cryptocurrencies:
1) Crypto Brokerage – Best for Newbie Traders
If you are new to the crypto market, take your time. You can receive tons of help if you pair with a crypto broker. Brokers act as middlemen between you and your trades and are there to help you develop the right trading strategies. Not only do they provide educational material on crypto topics, but they also give users tools to help with trading.
What’s best is their 24/7 customer service – that way, if you have a question, even in the small hours of the morning, they are there to answer. You can find a vast range of new tokens and coins to pick from and truly diversify your portfolio. Even as an experienced trader, you can still benefit from a broker with their tailor-made trading tools.
Our pick: Immediate Connect website
2) Crypto Exchange – Best for Seasoned Traders
Crypto exchanges are another great place to buy and sell crypto. Here you might need a little more experience to take full advantage of the platform. For instance, you will need to read charts and understand the historical correlation between crypto prices. Luckily, there is plenty of information online that can help you boost these skills. Most crypto exchanges offer blog posts to aid newcomers.
You may also enjoy tons of trading features, like stop/loss orders, real-time price charts, margin trading, copy trading, and more.
Our pick: Coinbase
Final Thoughts
Now that we have explained the connections between crypto, inflation, and recession, you can better understand how they affect the global economy. Inflation diminishes the value of money, and recessions cause declines in the economy.
Luckily, crypto offers possible protection from this uncertainty. However, we would like to mention to investors that researching the crypto market is crucial. It would be best to remember that the crypto market is volatile in and of itself, so invest with caution and use common sense. You can always seek the advice of a financial specialist and work together to create tactics to doge the effect of inflation and recession.
