It’s difficult, if not impossible, to confidently say how inflation will affect cryptocurrency. This is because cryptocurrency as an asset has only existed for a little over 10 years. During most of that time, major economies experienced little significant inflation. As a result, the inflationary pressure of 2021/2022 is the first time that investors have traded cryptocurrency during an era of significant consumer price hikes. While I will share a little, you may want to consider talking to a financial advisor who is experienced in cryptocurrency investments to help you decide how to respond during inflation spikes.
Crypto is not and never has been a functioning currency all over the world. The IRS and SEC do not recognize cryptocurrency assets as cash holdings. Instead, the SEC has determined that crypto assets fall into two investment classes:
1. Commodities
Assets like Bitcoin, which have a pre-determined quantity and nature, are considered commodities in the same vein as gold and silver. While digital assets instead of physical, they otherwise operate on basically the same principles.
There is an amount of Bitcoin that can exist, and which is determined by the asset’s algorithm, just like there’s an amount of gold that can exist which is determined by what’s down in the ground. Bitcoins don’t have an underlying enterprise that would change the nature of the asset. Like gold, silver, iron and lumber, a Bitcoin simply is what it is and investors can buy, own and sell it as the market will bear.
2. Securities
Assets like a utility token or a stablecoin, which can be generated as the underlying project sees fit, are considered securities like a stock or bond. While not traditional assets, tokens operate on the same basic principles as any other securitized asset.
An underlying enterprise creates a group of tokens and sells them on the open market. They can create new tokens or eliminate existing ones at will, and the nature of that token is defined by the nature of the underlying project. A utility token will gain or lose value based on business decisions made by the project that issued it, in a manner almost exactly like a share of stock.
Whether any given cryptocurrency is a commodity or a security, it is not a currency. This means that it will not behave like a currency. Instead, during an inflationary period, investors should expect a cryptocurrency to follow the rules of a high-risk investment class.
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