How cryptocurrencies could stabilize inflation.

We can buy less because our money is losing value. Solutions against excessive inflation are needed. Cryptocurrencies are being discussed in this context. Cryptocurrencies are independent of the current monetary system, meaning they are not controlled by the state or central bank. They are resistant to manipulable inflation. Why is that the case? Let's first look at how inflation can arise.

Today, the government and the central bank can increase the money supply at any time as required. If they increase the amount significantly, then there is more money in circulation in Germany than we produce goods and services nationwide. If there is more money, then people want to buy more goods and services. As a result, prices rise and money becomes worth less.

Deliberately low inflation

What many of us don't know is that the central bank's monetary policy is deliberately aiming for steady inflation of two percent per year. This has a positive effect on economic growth. At the same time, however, this also means that our money is deliberately devalued every year. Now imagine this in purely mathematical terms. If you paid 100 euros into your savings account 20 years ago and inflation amounted to two percent every year, the amount you saved today has a purchasing power of just under 70 euros. In 2040, the 100 euros will still be worth 13.26 euros. And if the inflation rate continues to rise, it may be worth even less in old age.

Inflation rate rises

In Germany, the inflation rate has risen well above the desired 2% in the last two years. In 2022, the inflation rate was exceptionally high at 7.9%. Inflation at this level means that money rapidly loses purchasing power over time, leading to a massive devaluation of income. As a result, consumer and investment demand is weakened as people have less purchasing power and can afford less. Let's do the theoretical calculation example again, this time with 8% inflation: you pay 1000 euros into your savings account today. With an annual inflation rate of eight percent, your savings will only have a purchasing power of 215 euros in 20 years' time.

For this reason, central banks try to bring down inflation that is too high. One of their tools is to raise the key interest rate. This means that loans become more expensive and less new money is borrowed. Everyone who has a loan or mortgage has to pay higher interest rates. If they could no longer repay these installments, this would weaken the banks, which in turn could lead to a financial crisis.

Cryptocurrencies offer the opportunity to prevent devaluation. They are managed decentrally by a community of users. In addition, the total amount of the best-known cryptocurrencies, such as Bitcoin, is limited. Their quantity cannot therefore be increased at will by a central authority, as happens in our current monetary system. The scarcity of bitcoins is already transparent and unchangeable, so to speak, which prevents inflation.

As you can see, cryptocurrencies have a lot of potential as an inflation hedge. However, you also have to bear in mind that they are exposed to many price fluctuations and may need to be regulated even more. The discussions are ongoing. We cannot say today which monetary systems we will rely on in the future. In any case, cryptocurrencies allow us to rethink the issue of preserving the value of money.