Will 4% inflation make the crypto market rise?

Central banks set inflation targets to keep inflation under control. The current economic turmoil may mean that central banks have to adjust these targets upwards. This in turn would be bad for the value of fiat currencies, but positive for cryptocurrencies in the long run.

For years, the banks’ monetary policy succeeded in keeping the inflation targets at or below 2%. Governments were able to control their debt and achieve economic equilibrium.

But the rules of the game changed dramatically during the 2008 financial crisis. Investment banks caused the crisis by issuing bad loans – and profited from it at the same time. Satoshi Nakamoto created the cryptocurrency Bitcoin in response to the negative consequences associated with this inevitable collapse. Bitcoin allows people to protect themselves from the banks because a third party is not used for the transactions.

Now the economic failure repeats itself. This time, however, inflation is getting out of control: Central banks are forced to adapt to a new situation to react.

FED Raises Inflation Target: A Historic Moment for Crypto

For years, the US central bank’s inflation target was 2 per cent. As the business newspaper The Economist wrote in an article last week, the Fed may soon raise the inflation target from 2% to 4%. Circle CEO Jeremy Allairs tweeted the article below in response to an offer from crypto liquidity provider Cumberland explaining what this new normal means for the crypto market.

According to the Economist article, raising the inflation target to 4% gives banks more leeway. The central bank can thus not only generate an additional surplus for the state budget, but also create a way out of the impending disinflation crisis.

But raising inflation targets is also a dangerous proposition. Because the increase may lead to a loss of confidence among the population, which may interpret this move as an easing of monetary policy. In addition, inflation leads to inequality in the world. That’s because inflation-linked investments aren’t available to most people, according to The Economist.

At times like these, capital tends to flow into assets that rise in value. This time, as before, it is likely to be real assets such as real estate or commodities. However, Cumberland described the current macroeconomic scenario as historically unique. For now, there is a new asset class available to almost everyone: crypto.

Will cryptocurrencies benefit?

The narrative that cryptocurrencies are a hedge against inflation has become less relevant this year. The crypto prices behaved like the prices on the stock markets and were mostly in the red in 2022. However, market cycles typically last a few years. So, in the long term, high inflation can still have a positive impact on digital asset prices.

According to Cumber, it’s crypto more about devaluation protection than protection against inflation:

“But persistent, condoned inflation is just another form of fiat currency deterioration — a backdrop against which cryptocurrencies perform spectacularly.”

For example, if you look at the development of the crypto market in Argentina, you can see how the “anti-inflation” properties of cryptocurrencies work.

Bitcoin and crypto are also proving to be protection against inflation in other countries such as Turkey or Venezuela. In all these countries, fiat currencies have crashed, while crypto prices have risen in local currencies.

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