Over the last couple of years, the world has been experiencing several financial difficulties.
Inflation fears that began back in early 2020 are starting to be fully realized, with economies across the globe struggling to cope – which has subsequently upped the cost of living and eroded a suitably even income to unevenly rising prices.
More recently, the disintegration of SVB – the Silicon Valley Bank – has led to uncertainty around how traditional financial services can cope with the pressures, not least with the world of a cryptocurrency offering a supposedly more sustainable alternative.
Despite its relative volatility, cryptocurrency has long claimed to be a counter-inflationary asset, meaning that, when the value of a user’s regular fiat currency drops, the value of their cryptocurrency will increase.
This is large because – despite its name suggesting otherwise – cryptocurrency is not actual currency.
It doesn’t respond to inflation pressures in the same way that fiat currency does. This can be seen not only in Bitcoin’s performance over the last few months but several other altcoins that exist within the market. Take Kusama, for instance.
The Kusama Price is currently strong when compared to several rival altcoins, with its “stablecoin” released in August 2021, also doing well.
This is especially impressive, as a stablecoin is inherently linked to a traditional asset – in most cases the US dollar – but the price of kUSD, despite the current pressures on USD, is sitting above the US dollar by quite a sizable margin.
Stablecoins Remain Stable
Most stablecoins across the cryptocurrency market are – for want of a better word – stable.
This is even though global inflation is mounting, which many had claimed to be a sticking point when it came to stablecoin reliability – especially after the Terra and LUNA debacle that caused a cryptocurrency meltdown back in 2022.
The truth is, however, the current financial climate could prove stablecoins to be the ultimate answer to both cryptocurrency market upheavals and traditional financial market inflation.
To understand why this is the case, it is important to look at the borderless nature of stablecoins.
Blockchain technology is, after all, accessible to nearly every country, which means it has the ability to travel across borders in a way that traditional currency cannot. It is also a way to cater to the “unbanked”.
That is to say, for those without a bank account – perhaps because of the fears that have arisen since the SVB collapse – stablecoins allow people to own their currency through a digital wallet. If it’s difficult to comprehend why this is important – or how it is done – let’s look at an example.
Venezuela, for instance, hit an inflation rate of 155% in October last year.
This means that the native coin, the bolivar, has a far lower value than something like the US dollar or the Euro. Because of this, it is normal for traders to list service prices in US dollars, with consumers paying in US dollars rather than bolivars.
But the exchange rate relative to the dollar is immense, and the ability to exchange dollars can be scarce.
Most consumers are forced to pay using bolivars, making it impossible for people to save, spend or build their finances. With stablecoins, however, people are finding a way around the problem. Stablecoins essentially plug the gap for anyone with internet penetration,
Hedging Against Inflation With Stablecoins
Stablecoins also allows users to utilize their monetary assets to hedge against inflation when the pressures are mounting. Any user in the cryptocurrency market, can not only hold onto their stablecoins but stake their tokens to earn yield.
Ordinarily, in cryptocurrency, many variables make staking difficult – including APY, the size of the pool, liquidation, and assets themselves. Stablecoins, however, simplify the process.
The volatility and variables that come with cryptocurrency do not play as much of a role, as the stablecoins are pegged to their financial asset.
Of course, staking other tokens that are not pegged to a US dollar can provide higher yield results, but – in line with cryptocurrency volatility – they could be worth a lot in 2023 and then nothing in 2024.
Staking stablecoins can allow a user to stay ahead of inflation which, in turn, drives up the value of any stablecoin that is being regularly staked.
At the very least, then, a trader during inflation fears can stake their coins, fail in earning a high yield, and still find themselves sitting with coins that have the exact value of the US dollar once the inflation pressures have ceased.
There are always risks when it comes to staking cryptocurrency, however, trading strategies must be researched and understood before any user sets off on a trading venture.
What is clear, however, is that stablecoins are – as of this moment – living up to their name and providing a chance for stability in a financial climate that is anything but stable. This, in turn, might drive more people towards blockchain and help to lift cryptocurrency to new heights over the next few years; making it the true deflationary asset.