Cryptocurrencies May Not Be the Answer in Times of Economic Instability, Research Says

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The design and behavior of cryptocurrencies may make it an unsuitable replacement for fiat currencies, especially for people in economic and financial turmoil, noted fintech and blockchain research publication Diar on September 11, 2018. 

Significant Degradation in Purchasing Power

Diar recently published data that explores a range of cryptocurrencies from Bitcoin, Ripple, Bitcoin Cash, to ZCash and Nano. According to the data many cryptocurrencies, including the established ones like Litecoin and DASH suffer from supply inflation or a significant degradation in purchasing power. The Next Web even noted that when you consider the yearly average of a token, most tokens are fairly “useless” when it comes to fighting inflation.

(Source: TNW)

For a cryptocurrency to be useful for a nation with a failing economy, the purchasing power of the currency needs to remain stable, especially in comparison to the weak fiat currency. TNW believes that since most cryptocurrencies suffer “some form” of inflation it makes the tokens “fairly useless as a safe-haven.”

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According to the Diar report:

“When the inflation rate is positive, the purchasing power declines and vice versa. Bitcoin, XRP, Nano, EOS, Stellar, Cardano, and IOTA have been deflationary year-on-year while the rest was inflationary…However, if we consider year-to-date inflation, all of the cryptoassets were inflationary.”

Cryptocurrencies are Not Effective Against Economic Instability

For example, Bitcoin, one of the cryptocurrencies that inflate the least experienced more than 50 percent inflation in one year. Bitcoin’s stored value is worth less than half as much.

On the other hand, the Turkish Lira, while it did drop 20 percent of its original value, would be a better hedge and currency to fight against inflation than Bitcoin.

“In a time of economic uncertainty, it can be expected that people would rather switch to a cryptocurrency with a predetermined generation algorithm, which guarantees certainty of issuance,” said the research. “While the price can never be guaranteed, certainty is more favorable than a monetary policy decision being made by a small group of developers.”

Diar, however, noted that if a cryptocurrency were to be used as a hedge against any financial uncertainty, the best ones would be those with a clear algorithm where there isn’t an increasing circulating supply anytime soon. These include NANO, IOTA, or Cardano. Others with an inflation rate that exceeds 2.5 percent are not the best currencies to use as a hedge against economic instability.