Since the 2008 financial crisis, something strange has been happening with the US economy that has startled economists and politicians alike.
Philip’s Curve defines an inverse relationship between the inflation rate and the unemployment rate. Meaning, as the unemployment rate settles below the natural rate of unemployment, any further slide in the unemployment rate leads to rising inflation rates. Ever since the global financial crisis, however, the inflation rate in the US has been surprisingly low. Even in 2019, when the US economy saw the lowest recorded unemployment rate in history. But, the pandemic has forced the central bank and the Policy Makers to exert coordinated efforts to revive the economy. While the Fed is keeping the target interest rate 0–0.25%, the policymakers are passing Trillion dollar bills to boost consumer spending. Lower borrowing rates and an increase in disposable income are expected to increase consumer spending and contribute to temporary high inflation. While 0–5% of inflation is good for the economy, the innate nature of inflation is as such that it can be hard to determine what is actually happening with the economy. Is the real disposable income of consumers increasing or falling?
The reckless printing of the Dollar and expectations of inflation, has prompted many investors to hedge against inflation by investing in cryptos. For example only yesterday, the US House of Representatives has passed a $1.9 Trillion relief bill. Through a history of inflation in countries like Zimbabwe and Venezuela, we know that a rampant increase in money supply causes the purchasing power of an asset to drastically fall. For many individuals and institutions, cryptocurrencies are safe haven to store their wealth.
Unlike fiat, cryptocurrencies like Bitcoin have a limited supply cap. The world can only mine 21 million Bitcoins. In the short-run market price of Bitcoin may be volatile. But, the limited supply insured through halving and increasing demand of Bitcoin has investors convinced that the price of Bitcoin is only going to go up from here on. Altcoins like Ethereum may not use principles of finite supply to curb inflation, but they have their own mechanisms to preserve their purchasing power.
Ethereum follows a fixed issuance schedule to control the number of Ethereum in circulation. For every block produced in the network, Ethereum issues two new coins. The bock-reward issuance is subject to change. For example a few years ago: the fixed issuance schedule was 3ETH/block, prior to that it was 5ETH/block. Regardless of the total number of active users, market price, or the number of transactions, Ethereum is programmed to steadily increase its supply. As long as the demand for Ethereum outpaces the issuance schedule, the coin is designed to resist inflationary pressure.
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