Quantfury Daily Gazette
Cryptos as an antidote to inflation
Just as plants in the desert developed thorns to retain water and adapt to a hostile environment, humans developed antibodies to withstand more inflation. Robert Schuettinger’s book “Forty Centuries of Wage and Price Controls” summarizes the fact that inflation is not a contemporary problem; it has been around as long as money has existed.
Closer to where we are now, in the early 1970s, inflation was in double digits in almost every country in the world. But that changed in subsequent years after widespread interest rate hikes cooled most of the world’s economies, leading to a prolonged global recession and declines in the vast majority of stock markets.
On our side, in the 80s, emerging countries had debt crises due to higher interest rates, then hyperinflations due to issuing money to pay those higher debts. The recession deepened more than in developed countries because they could no longer issue money, and in the end, they were forced to settle their accounts the hard way.
Does that situation seem familiar, and are we starting a new cycle today? Inflation today is lower than it was 50 years ago, but the fear is latent. Let’s stay here and focus on emerging countries, particularly in Latin America. The cases of Ecuador and El Salvador exemplify that dollarization is a great antidote to inflation, but what happens if the dollar also loses its value? How does one protect themselves from global inflation of almost 10%? Let us also look at what is currently happening in the countries with the highest inflation and what they can teach us.
If there’s anyone that knows about inflation, it’s the Argentinians: in the last 60 years, the currency changed its name five times with the excuse of “removing zeros.” Thus, one peso is equivalent to 10,000,000,000,000,000 of the first Argentine currency (The peso moneda nacional) which was valid until 1969. The thirteen zeros removed from the currency, in a very simplified way, show the loss of value caused by years and years of generalized inflation, which today, once again, is on its way to being 100% per year (prices double every 12 months).
If anyone has the pleasure of visiting Buenos Aires (or any Argentine city) they will be surprised to see countless advertisements about cryptocurrencies, the Fintech ecosystem and the new digital economy. This not-so-new paradigm understood very well the needs of users, and the development around cryptos environment was fast and very well received. It’s no coincidence that countries with higher inflation show a higher acceptance of digital assets, where the adoption of cryptocurrencies and decentralized finance are vital pieces.
Let’s talk about money and banknotes. It is usually said that money must fulfill three properties: Medium of exchange and payment, so it must be accepted on a daily basis in transactions; Unit of measurement, meaning that the prices of goods and services are measured and expressed in terms of the accepted money; and finally, Deposit of value, which requires money to maintain its value over time.
Inflation prevents traditional money from being a store of value: a bill tomorrow will buy fewer goods and services than a bill today. This is where stablecoins (such as USDT, USDC or DAI) appear, which aim to provide security and avoid the volatility of traditional cryptos such as BTC and ETH, and which became a common substitute for traditional fiat currencies, with the bonus that most of them earn interest which at least partially protects investors from the effects of international inflation.
This can be seen very clearly through the ratio between the market capitalization of stablecoins and the market capitalization of BTC, which measures the ratio of value of all stablecoins relative to the value of all BTC. This ratio reached a new ATH at the end of September at around 40%, leaving two conclusions: First, stablecoins managed to attract investors and greatly collaborated to crypto adoption; second, BTC has 40% of its market cap waiting for a new rotation cycle from stablecoins to traditional crypto.
Is there value in this market? The answer is a resounding yes. In Argentina, as in many other countries, cryptocurrencies today are fulfilling the mission of value refuge (and also as a means of payment) that money cannot fulfill. Stablecoins appeared to bring decentralization, transparency and sovereignty to those who do not want to risk volatility, together with a limited but adequate protection against inflation.
The next step for the acceptance of cryptocurrencies should be for them to function as a unit of measurement. How many BTC is a Tesla (NASDAQ: TSLA) worth? How much ETH is a Coke (NYSE: KO) worth?
Let’s recall what Robert Kiyosaki wrote in The Conspiracy of the Rich: “If you are diversified evenly, when one asset goes down, the other goes up. You lose money on one side and gain on the other, but you’re not really gaining ground; you’re just staying static. Meanwhile, inflation marches on.” Changing the chip takes time, but while we wait, let’s not allow inflation to erode the value of our assets.
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