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In recent years, the adoption of cryptocurrency has accelerated, with over 420 million people owning crypto around the globe. As rates continue to grow, many people are wondering how the development of crypto has impacted the traditional finance system. Here, we take a look at the impact of crypto on inflation and the US dollar to get a better idea of how new-age finance has affected the traditional system.
The impact of crypto on inflation
Inflation is a term that is used to describe the overall increase in prices for goods and services in an economy over time. Inflation can be measured by using the Consumer Price Index (CPI) which tracks the average price of goods and services.
Inflation has risen significantly over the last decade with current levels sitting at around 5% in the US. Since the launch of Bitcoin in 2009, cryptocurrencies have made a name for themselves as a hedge against inflation. This is due to the fact that many crypto assets are deflationary, so gradually decrease in supply over time.
One way that cryptocurrencies could impact inflation is through increased adoption. As cryptocurrencies become more widely accepted, investors may choose to invest in crypto assets rather than fiat currencies, which have not been able to hedge against rising rates of inflation.
As more people invest in cryptocurrencies, they may choose to hold fewer dollars, which could reduce the overall demand for the currency and potentially lead to a decrease in its value relative to other currencies. A decrease in the value of the dollar could then lead to further inflation, as the prices of goods and services denominated in dollars increase.
The impact of crypto on the value of the dollar
The dollar is one of the largest global currencies and is directly pegged to a number of crypto assets. The best way to objectively track the value of the dollar is to use the US dollar index which tracks the dollar against six other major currencies.
Cryptocurrencies could potentially impact the value of the US dollar in a few different ways, although the precise nature and extent of this impact remains uncertain.
Cryptocurrency is often seen as an alternative to fiat currencies like the US dollar. If market sentiment around crypto is positive, this could attract investors away from US dollar investments. However, when the crypto market experiences negative sentiment, support for the dollar typically strengthens. At the moment, rising inflation means that cryptocurrencies are being used to protect wealth. The DXY chart shows that the US dollar has weakened since the beginning of the year.
Overall, the impact of cryptocurrency on inflation and the value of the US dollar is uncertain. Cryptocurrencies are still very new and we will not know the true extent of their impact until mass adoption occurs. It is also important to note that the crypto market is highly volatile which means that sentiment can change at any time. Furthermore, cryptocurrency is not the only factor that should be considered when looking at inflation and the value of the dollar. There are plenty of other external influences that could impact both.
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Mr. Pratik chadhokar is an Indian Forex, Cryptocurrencies and Financial Market Advisor and analyst with a background in IT and Financial market Strategist. He specialises in market strategies and technical analysis and has spent over a year as a financial markets contributor and observer. He possesses strong technical analytical skills and is well known for his entertaining and informative analysis of the Financial markets.
