Modern Economic Nonsense — Crypto winter prolonged with high inflation persists
It’s been a challenging few months for the crypto world with prices falling since the start of January. However, this has also had an impact on the wider economy, which has resulted in high inflation rates. Cryptocurrencies are considered as a medium of exchange and are not meant to be saved or stored for future use. Therefore, holding cryptocurrencies attracts higher interest rates than holding traditional assets like government bonds or cash. The effect is that even though prices have fallen, it’s left investors with higher amounts of capital invested in cryptocurrencies than before. Furthermore, the prolonged crypto winter is another contributing factor to increasing inflation rates; as there is less demand for goods and services outside of the crypto community.
The year-on-year inflation for retail goods has remained positive since December 2018. This means that although prices have fallen over time, they’ve only fallen by small amounts on each monthly basis. Meanwhile, core inflation (i.e food, energy and housing) has increased significantly since March 2021. In other words, while foods haven’t become more expensive since then, other essential items like rent and utilities have become a lot more expensive over time. Even as prices fall further in 2020, it seems unlikely we’ll see any significant reduction in inflation until after the end of Q1 2024, when third-quarter figures are released in early July 2022.
What determines consumer prices?
Consumer prices are determined by the supply and demand of goods and services. Typically, inflation occurs when there is an excessive increase in the supply of goods and services relative to demand. This usually happens when prices are kept too low for an extended period of time, or when demand is low but increasing.
Crypto winter delays price reduction
When prices fall due to a decrease in demand for cryptocurrencies, this also results in increased demand for goods and services that use cryptocurrencies as a payment method. As a result, prices increase due to the increased demand as well as lower supply.
Consumer price growth acceleration
Over the past few months, there’s been a significant acceleration in core inflation. However, business costs have remained relatively flat. On the one hand, this suggests that businesses have started passing on price increases to customers. But on the other hand, it shows they haven’t been expanding their operations at the same rate as demand has increased. This indicates that businesses may not have enough customers to keep up with the demand for goods and services. However, many small businesses have flexibility in their price structure and can be easily weathered to adapt to the price surge. Crypto can also help small business owners to survive such an uncertain environment.
Crypto payment systems can sustain in a high inflation environment
Cryptocurrencies are meant to be used as a medium of exchange and a store of value. Therefore, cryptocurrencies are extremely susceptible to changing prices that can affect their overall value. If the prices of goods and services increase faster than the value of cryptocurrencies, then this leads to a decrease in the real-life worth of the assets. That is one reason the crypto market capitulates. However, it’s worth note-taking that the crypto payment system is on the rise in retail adoption, and users will have more alternative payment methods to pay off their purchases during the high inflation environment, which can set a foundation of the crypto payment infrastructure. Therefore, the negative impact of crypto winter will likely be reversed in the coming years.
Conclusion
Cryptocurrencies have been in a prolonged crypto winter due to low market prices, but the effect is starting to wear off. The prolonged crypto winter has also resulted in higher rates of inflation, which will likely persist until the end of 2020. The bad news is that the rate of inflation is expected to be persistent for a while. Therefore, the negative impact of crypto winter will likely be continued. In the meantime, consumers can take advantage of lower prices on goods and services due to the prolonged crypto winter, making it an ideal time to utilize more crypto payments if available to pay off purchases while enjoying the low costs of owning some cryptocurrencies.
