Cryptocurrencies might be the best Protection against Inflation
Deutsche Bank released a report where it clarifies that it sees cryptocurrencies as one of the best alternatives to protect against inflation. Christian Nolting, Deutsche Bank´s CIO, voiced his opinion on cryptocurrencies and the blockchain. It seems that Christian believes cryptocurrencies have a strong potential when it comes to protecting against inflation.
While Nolting notes that the highly speculative nature of an investment in cryptocurrencies such as bitcoin, ether, and litecoin have its own risks, he and Markus Muller, global head of the CIO office, also point out benefits as well as risks. Nevertheless, both the financial gurus note the need for a central bank to back a cryptocurrency for it to gain meaningful traction and truthfulness.
One of the major benefits cryptocurrencies have to offer is that for those locked in sovereign regions where runaway inflation transforms the local currency into a worthless store of value, cryptocurrencies usually work out as a “safe haven.” Because most cryptocurrencies are limited the inflation risk is low, and this turns out as the perfect tool to circumvent these sort of issues.
For instance, Venezuela had an inflation rate of 250 percent in 2016, and the IMF expects a rate of 700 percent in 2017. And in this case, cryptocurrencies could, in fact, represent a form of protection against inflation in crisis-stricken countries, as the volatility is relative to a local currency volatility. According to Christian Nolting, cryptocurrencies need a central bank’s help to gain “general acceptance.”
Nolting states, “Blockchains and connected cryptocurrencies are probably the inventions with the most disruptive character for the finance sector and the public since the invention of the internet.”
In an attempt to avoid the now predictable rhetoric that cryptocurrencies are a “fraud” or “bubble,” the Deutsche Bank report took a balanced view. Nolting notes there are new cryptocurrencies like IOTA, which apparently have solved this problem with a new structure. But, as the financial guru also notes, the inflationary benefits are not built on an entirely sound foundation, pointing to the splitting of Bitcoin and Bitcoin Cash:
“Reproductions and splittings could have an impact on the inflation rate as this could increase the number of available currency units.”
The report also notes that known cryptocurrencies are bitcoin, ether, ripple, litecoin, and IOTA. In a sense they are scarce commodities as the amount of available currency units is in this case limited by mathematical algorithms. Since it has a limited amount, after every digital token unit being issued, there is no way to generate additional currency units from it. Furthermore, every cryptocurrency has its own issuance process.
Deutsche Bank retrospective of “mining” the cryptocurrency
While mining for cryptocurrencies was at one point something that could be done by any individual, it has largely become impractical for bitcoin. Today, mining is controlled by large conglomerates, and while it was worth for anyone to mine alone a few years ago, this has become impractical because of high hardware and energy costs, which makes it unprofitable at this point.
The energy needed to mine digital currencies has skyrocketed. Several news agencies now estimate that Bitcoin mining currently uses more electric power than many small nations altogether. According to Digiconomist, Bitcoin emits what amounts to 17.7 million tons of carbon dioxide every year, making the production of the digital currency an environmental nightmare that is likely to grow. However, Bitcoin proponents point to the relative efficiency when compared to the overheads of existing financial networks and gold mining.
Deutsche Bank report notes that this feature is currently one of the essential flaws of Bitcoin and for cryptocurrencies be able to solve this issue a new form of issuance needs to be developed, as the bank had previously voiced its opinion where it clearly sees the end of fiat money.
The government in Dubai, one of a handful of financial hubs in the Middle East, is the first to embrace a cryptocurrency fully. Dubai government created their own cryptocurrency called emCash for government transactions and daily payments, while in Japan, cryptocurrency is now a legal payment method. So, it seems that digital currency is in fact, here to stay, and it is only a matter of time until it is completely accepted as a legal payment method all around the world.
The Deutsche Bank report noted:
“Cryptocurrencies will raise further attention, particularly in crisis countries they could represent an alternative to inflation threatened currencies. It will be very interesting how the blockchain technology evolves beyond cryptocurrencies in the public and financial sector.”
With gold the traditional avenue to hedge inflation, it seems that more and more cryptocurrencies are fulfilling this role too. As more bitcoin, litecoin, and monero enter circulation and their respective inflation rates continually fall over time, these cryptocurrencies will benefit as it becomes clear to others of the slow, perpetual inflation used to erode the purchasing power of fiat currencies.