Will global inflation drive a cryptocurrency revival?

Despite the recent crash in many cryptocurrencies, Eric Eden believes that the impact of global inflationary pressures will see more and more people begin to use cryptocurrencies.

During COVID, the deafening sound of governments' money printing machines could be heard across the globe. It's only now that the impact is being felt. Central banks flooded their countries with cash to keep the wheels of the economy spinning. Every action has a reaction; inflation, triggered in part by the effect of quantitative easing, is burning workers' pay slips and savings from both ends.

Recent history shows us that inflation is often correlated with a high uptake of cryptocurrency, as consumers desperately search for alternative stores of value. With inflation on the rise, I believe many more will continue to adopt cryptocurrencies. This is a future that governments shouldn't fear, but embrace.

When shrinking currency reserves, geopolitical tension, increasing debt, and poor monetary policy led to a 40 per cent fall in the Turkish Lira, cryptocurrency trading in the country boomed. Brazil's currency, the real, experienced a devaluation of 218 per cent between 2011 and 2018. This cannot be separated from the fact that according to research conducted by Gemini, 41 per cent of Brazilians intend on buying cryptocurrency over the next year. South Africa tells a similar story. With a 103 per cent devaluation of the rand over the past decade, 32 per cent of South Africans express a desire to buy cryptocurrency over the year.

The most potent example is Venezuela. In 2022, inflation sits at a staggering 2000 per cent and reached a high of 65,374 per cent in 2019. Unsurprisingly, Venezuela has the third-highest crypto adoption rate in the world.

The sources of South African, Venezuelan, Brazilian, and Turkish inflation have largely domestic causes, from slumping economies to federal reserve policy. Yet today, we are not seeing contained inflation, it is spreading across the globe. In fact, the number of countries around the world that have had banking or currency crises is startling.

Two threads of factors are at play. On the supply side, labour shortages, extreme weather events, and a breakdown of supply chains have driven up the prices of food across the world. COVID-19 led to a shutdown of supply as manufacturing across the world halted. Similarly, we have seen a huge flip in the shape of demand. Nobody bought flights, yet everyone wanted new lawnmowers. The dynamics of consumerism were suddenly altered, and supply chains failed to handle the shock.

Finally, in a bid to boost liquidity and get money flowing around the economy, central banks started implementing quantitative easing, a practice that is typically associated with adding to inflation. In fact, it was this practice that triggered Zimbabwe's hyper-inflation, which topped out at 79,600,000,000 per cent per month, ultimately destroying the Zimbabwean dollar.

Likewise, the United States has more than doubled the amount of US dollars in circulation in the last ten years. Just printing more money is what makes the money less valuable and drives up inflation. At the same time, the United States has increased its debt limit 57 times since WWII and now has over $29 trillion in debt – an amount that will be difficult to ever repay.

So why do people turn to cryptocurrency in times of inflation? The reason is that most cryptocurrencies are deflationary by nature. We can take Bitcoin as an example; new bitcoins are only released into the system when a transaction is verified by a user, or a 'miner'. Bitcoin cannot be released into the system artificially. This means that the value of Bitcoin cannot be altered due to the policy of a central bank or federal reserve. It's understandable that in times of hyperinflation, as seen in Venezuela or Zimbabwe, citizens would rush to convert their hard-earned cash into a currency immune to poor economic management by politicians.

This is why I believe inflation will trigger a global mass adoption of cryptocurrency. Cryptos like Bitcoin and Ethereum have a notorious reputation for being volatile. Most of the time, this volatility is driven by smaller, hype-fuelled headlines. As the price soars, people cash in, and the currency falls again. This being said, the below chart shows why Bitcoin has been the highest performing asset over the last 10 years – with a compounding annual growth rate of 200 per cent a year for the last 10 years.

2021 saw its fair share of smaller triggers for cryptocurrency adoption. El Salvador's adoption of Bitcoin as a national currency gave many retail traders a sense of things to come. PayPal and Cash App have both added support for cryptocurrency, further adding to the sense of mainstream legitimacy surrounding cryptocurrencies. Finally, Meta's (formerly Facebook) announcement of the Metaverse, which will utilise cryptocurrencies and blockchain, cemented cryptocurrencies' image as a viable financial instrument.

Whilst impactful headlines, these adoption events have a certain shelf-life; the initial excitement wears off as the flurry of buying and selling burns itself out.

Yet the steady, global rise of inflation is not simply hot news today and a historical footnote tomorrow. It is not driven solely by headlines, but rather by the day-to-day economic experience of billions of global citizens who feel the daily pinch of a less powerful pay slip.

Artificial media hype isn't as powerful as an economic motive. When millions of people around the world start to feel the instability that is baked into the traditional system, alternative currencies start to look like a more attractive option.

The mass adoption of cryptocurrencies will only increase as a result of inflation, and governments must be prepared. Tax laws surrounding cryptocurrency must be fair, comprehensible, and transparent rather than punitive. Lawmakers should work with exchanges rather than against them as these currencies start to provide a real, inflation-proof store of value in the age of global inflation.

Regardless of what the cryptophobes say, the uptake of cryptocurrency has continued to rise in 2022. As inflation affects every consumer across the globe, I'm confident that we can expect the uptake of Bitcoin and the wider cryptocurrency market to continue. Governments shouldn't fear the inevitable. It's time for them to embrace it. Countries that do not figure out a fair and reasonable approach to cryptocurrencies are likely to become less competitive in the global economy.