People are wondering about inflation’s effect on cryptocurrencies because inflation and crypto haven’t coexisted in the United States – until now.

America’s inflation rate rose to 8.3% in the 12 months ending in April 2022. That’s the highest inflation rate America has seen since 1981, according to the US Inflation Calculator.

Inflation is higher in some areas of the economy. For example, energy prices rose by 30.3% between April 2021 and April 2022.

Crypto didn’t exist the last time inflation was this high. Bitcoin (BTC), the first cryptocurrency, was launched in 2008, just 14 years ago.

Instead, cryptocurrencies have flourished in an era of low inflation. For example, the annual inflation rate was 1.4% in 2021 and 0.7% in 2015. The Great Crypto Boom occurred in an era of low inflation.


Can Inflation Hurt Cryptocurrencies?

There’s circumstantial evidence that inflation destroys cryptocurrency’s value. Statista estimates the overall cryptocurrency market capitalization (the market value of all cryptocurrencies) hit a high of $3.049 trillion on November 10, 2021.

By May 17, 2022, the overall cryptocurrency market capitalization fell to $1.355 trillion. Statista’s figures show the cryptocurrency market lost over half its value as inflation rose.

The 12-month U.S. inflation rate rose from 6.8% in November 2021 to 8.3% in April 2022. Statista’s data shows cryptocurrency values fall if the inflation rate rises over 8%.


Why Does Inflation Hurt Cryptocurrencies?

Inflation hurts cryptocurrencies because creating or mining cryptocurrencies require enormous amounts of energy.

Columbia University analysts estimate that one cryptocurrency, Bitcoin, consumes 150 terawatt-hours of electricity a year, or more electricity than the entire country of Argentina. To elaborate, a terawatt hour is one trillion watts of electricity. Therefore, Bitcoin consumes 150 trillion watts of electricity a year.

High energy consumption leaves cryptocurrencies vulnerable to inflation because energy price inflation is rising faster than other costs. The US Inflation Calculator estimates the U.S. energy inflation rate was 30.3% in May 2022. Rising energy costs take the value out of cryptocurrency.


Crypto vs Gold

Market data shows gold prices are more stable than cryptocurrency prices. Macrotrends estimates that gold was trading at $1,830.80 a troy ounce on November 9, 2021.

The gold price rose slightly to $1,847.80 on May 23, 2022. This was the period when cryptocurrency’s total market cap fell from $3.049 trillion to $1.355 trillion, Statista reports.

In contrast, Bitcoin’s coin price fell from $67,582.60 on November 8, 2021, to $29,321.20 on May 26, 2022. Thus, gold retained its value while Bitcoin lost over two-thirds of its value as inflation rose.


Why Gold Retains Value

One reason gold retains its value is that you don’t need electricity to create gold or maintain gold. Gold mining and smelting are energy-intensive. However, you need no additional energy once gold is out of the ground and smelted.

Another reason gold retains value is that it’s harder to sell. You can sell cryptocurrency at the press of a button, just like stocks. Thus, cryptocurrency is vulnerable to the panics that generate sudden market movements.

For example, all it takes is one hysterical news story about crypto losing all its value to trigger a sell-off. In contrast, gold retains value because the market and speculators often ignore precious metals.


Is Gold a Better Inflation Hedge Than Cryptocurrencies?

Circumstantial evidence shows gold is a better inflation hedge than cryptocurrency.

However, the evidence for cryptocurrency is scant because the period of high inflation is less than a year old and cryptocurrency has only been around for 14 years. We have never seen a period where cryptocurrency coexisted with rising inflation in the United States.

Thus, inflation’s long-term effect on cryptocurrency is unknown. Although economists think inflation will fall. The Federal Open Market Committee forecasts that US inflation will average 4.3% in 2022 and 2.7% in 2023, Knoema reports. Conversely, economists surveyed by Bloomberg forecast 5.1% inflation for 2023 because of the Ukraine War.

History shows high inflation is good for gold. While we yet have enough historical data to say the same for crypto, the lack of such evidence shows its greatest risk. That risk is the lack of historical data to show how economic conditions such as inflation, deflation, or stagflation affect cryptocurrency.

If you’d like to learn more, free one-on-one consultation.

The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.


60 Years Experience