Crypto currencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Crypto currencies are decentralized, not subject to government or financial institution control. Bitcoin, the first and most well-known Crypto, was created in 2009.
Since their inception, crypto currencies have been seen as a potential alternative to traditional currency. One of the main benefits of crypto currencies is their ability to be deflationary, meaning that there is a finite number of them that can be created. This differs from traditional currencies, which can be printed at will by governments or financial institutions.
However, there has been a rise in inflation globally in recent months, which has led to concerns that this could negatively impact the price of crypto currencies. Inflation occurs when the cost of goods and services rises while the value of money falls. This can lead to people holding less money relative to the goods and services they want to purchase, which can lead to an increase in prices.
Inflation in Australia
Inflation refers to a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage change. In periods of high inflation, such as in the 1970s, prices can go up very rapidly, eroding the purchasing power of wages and savings. A sudden rise in inflation can also create economic uncertainty, leading to lower levels of investment.
The rise in inflation has been driven by the US-China trade war, as both countries have put tariffs on each other’s goods. This has led to increased costs for businesses and consumers in both countries. The US has also been increasing interest rates, which has led to a stronger dollar relative to other currencies. A stronger dollar makes imports more expensive, leading to higher inflation levels.
Australia has not been immune to the global rise in inflation, with the Consumer Price Index (CPI) rising to 1.6% in the September quarter of 2019, up from 1.3% in the June quarter. This is the highest level of inflation since March 2015. The rise in inflation has been driven by higher costs for housing, electricity, gas and petrol.
How can a rise in inflation impact crypto prices?
There are a few ways that inflation can impact crypto currencies.
Inflation can lead to a decline in demand for crypto currencies
Firstly, as mentioned earlier, one of the main attractions of crypto currencies is their ability to be deflationary. If prices start to rise due to inflation, this could lead people to sell their crypto currencies to buy goods and services that are becoming more expensive. This could lead to a decline in demand for crypto currencies, leading to a fall in their price.
Inflation can lead to an increase in the supply of traditional currency
Second, a rise in inflation can lead to an increase in the supply of traditional currency. This can lead to an increased demand for crypto currencies as people seek to escape inflation. As a result, this could lead to an increase in the price of crypto currencies.
Inflation can lead to a decline in the value of traditional currencies
Third, a rise in inflation can lead to a decline in the value of traditional currencies relative to crypto currencies. This could lead to an increase in the demand for crypto currencies, leading to an increase in their price.
Overall, it is difficult to say precisely how a rise in inflation will impact the price of crypto currencies. However, it will likely impact prices, either positive or negative depending on the circumstances. If you are a new trader, you should always do your research before getting started in crypto currency trading. We recommend using an experienced and reliable online broker from Saxo Bank and trying out their demo account before investing real money.