Inflation and Bitcoin – what does it mean for the daily shop?
BITCOIN – FULL FAT OR SEMI-SKIMMED?
Inflation is once again becoming the bogeyman of western economies, the Bitcoin price has nearly halved, interest rates are rising and markets are jumpy but where does that leave the everyday shopper?
There’s no doubt that rising inflation is the one thing all governments are keen to avoid – to say the least – especially when those ever-increasing prices for the daily shop directly affect voters. So would having Bitcoin as your national currency fare any better? Bitcoin, especially, due to its self-imposed cap of 21 million coins is deemed to be ‘deflationary’ – in other words, you can’t ‘print’ more of them the way governments of Europe, America and the UK have been doing like crazy with ‘Quantitative Easing’. Quantitative Easing pumps more money into a country’s economy but has the potential downside of contributing to inflation. Bitcoin, being capped at 21 million can’t be quantitatively eased, but it is subject, like shares, to price fluctuations which could never the less make for a rollercoaster ride
Bitcoin Inflation or Bitcoin deflation?
Bitcoin may be deemed deflationary – but if you live in El Salvador, which in 2022 declared Bitcoin as legal currency, the price of your daily shop virtually doubled (that’s virtual in the real sense – not in the metaverse sense). Bitcoin came down from highs of around $69k to a ‘mere’ $42k at the time of writing, so technically that basket of goodies from the local supermarket in El Salvador – assuming a normal spend of $50 – suddenly costs you nearer a $100. That delicious Pupusas (stuffed tortillas) and Sopa de Mondongo (tripe soup to you and me) are now 40% more likely to give you indigestion
Imagine in Germany if that Curry Bratwurst went from three to four euros in the space of a few weeks, or in the UK a wholesome chicken and mushroom Pot Noodle was suddenly nearly 50 pence more and your pint of milk went to a round pound? Unpredictable price movements like those encountered by Bitcoin lately can make it difficult for the everyday shopper/worker to compute how much Bitcoin they will need to pay for a cappuccino, a bottle of milk, or the daily bread. It’s even more difficult working out salaries and pensions.
Volatility may be great for professional investors playing the stock markets, but it’s one reason why the world’s economies are hesitant (to say the least) about designating bitcoin as legal tender. Such a move puts it in the hands of everyday people doing everyday things, and its impact on daily life could be very disconcerting. Of course, when the price swings up dramatically, that mouthwatering Pupusas or freshly cooked Pot Noodle suddenly gets a whole lot cheaper.
For the record, the coincub Q4 crypto rankings released late 2021 showed that, thus far, only El Salvador had declared Bitcoin as legal tender with Brazil stepping back from the brink of doing the same. Even the most cashless society in Europe, Sweden, hasn’t any plans to do so.
A great investment over the past five years
Bitcoin has plenty of critics and advocates but for those who got it right it’s been a winner. Bitcoin has galloped upwards from its beginnings – Amazonian-like – to rise from around $700 some five years ago, to its $42k today. Finding cryptocurrencies like Bitcoin which have had massive growth could be easier if you use crypto launchpads, where they list projects on the presale phase before they get launched into the market. That’s the sort of bitcoin inflation rate that investors love and which leaves most ordinary onlookers wondering how bitcoin can possibly be called deflationary?
On a more conventional level central banks around the world, including all those of the leading economies, have at least investigated, trialed or considered, some form of digital currency to see what advantages it may or may not have to offer. As yet the jury is out. In the UK, the considered opinion is that digital currencies and ‘decentralized financial systems’ may hold no palpable advantages over the existing financial system. Volatility can of course happen to conventional state-backed currencies, witness the devastating inflation in the Weimar Republic in 1923 when a flood of printed money led to hyperinflation and a loaf of bread, costing 250 marks in January 1923, rose to 200,000 million marks by November (it actually cost more to print banknote than each note was worth). Even Britain in the 70s saw the ravages of inflation and took years to recover from it.
The ups and downs of cryptocurrencies, however, remain outside the regulated financial system and do not impact the everyday lives of the majority of the population. This leaves the field open to the good, old-fashioned conventional inflation that we are experiencing today – and that’s more than enough for most governments to cope with.