How Does Printing USD Affect Cryptocurrency?
Today, the most popular cryptocurrency in the world is Bitcoin – and with good reason. It was the first crypto on the market and ever since its beginning has remained the biggest. Therefore, what applies to Bitcoin often applies to most altcoins.
Comparing it to a fiat currency like USD, one of the key differences is that Bitcoin has a limited supply of 21 million coins, making it a deflationary currency, as it is impossible to create more.
Essentially, this makes Bitcoin immune to inflation, as even when with time the purchasing power of fiat currency decreases, Bitcoin’s scarcity will make it hold value.
Of course, not all crypto is the same, and there are also cryptocurrencies that are inflationary, meaning that their supply is unlimited, such as Ethereum and Dogecoin. The value of these currencies is in theory determined only by the market.
Lately, Bitcoin has seen a massive surge in popularity and with it, in price. It recently broke the $60.000 mark and is speculated to continue rising. While there are many reasons for this rise in value, the one that is often overlooked is the current global situation that we’re all too well aware of – the pandemic (and the things it brings with it).
As the COVID-19 pandemic demands more and more money being invested into medical care, stimulus checks and relief packages, the U. S. Treasury is printing more and more notes. A worry many people have is that this can only result in inflation. Expert opinions on this are divided, some saying that they can safely continue to make more, others warning of impending inflation after the pandemic comes to an end.
A factor that is currently helping negate inflation of USD is the velocity of money. What this means is simply how much and how often money is exchanged. Seeing as in times of emergency (for example, a global pandemic), people tend to save more and spend less, it isn’t unusual to see that the velocity of USD is lower than usual, contributing to a more manageable rate of inflation.
While inflation is a valid concern, a halt in the economy is even more damaging and the economy as it is right now, supercharged by stimulus, is not an indicator of things to come.
Then what is driving the price of crypto right now? The biggest driving factor for crypto prices is exposure and mainstream acceptance, especially if we look at Bitcoin. Its bull run this year is a result of mainstream exposure bringing in new traders, corporations taking interest in cryptocurrencies, adoption on a larger scale and most recently, Coinbase’s market debut.
Compared to these factors, USD having less purchasing power over crypto compared to a few years ago is not affecting its price as drastically as one might believe.
Crypto enthusiasts often argue Bitcoin (and other crypto) as a hedge against inflation. Since the speed of crypto mining is controlled, other currency will depreciate compared to it, making the price rise over time.
This idea of limiting supply to control value is not limited to cryptocurrency, as it is shared by investors in general. It can be observed in practice by looking at some countries over longer periods of time, where the association between money supply and inflation is noticeable.
About the author:
Bor Kračun Pižmoht