Does bitcoin play a role in combating hyperinflation in developing countries?
That’s the central question of this article. I’ve heard a lot over the years about bitcoin serving as a “hedge” for inflation. But why is that? And what about extreme cases of inflation seen in developing countries. Does bitcoin play a role there?
To answer these questions, I’ve broken this article down into three parts:
- What is hyperinflation?
- Bitcoin and hyperinflation
- Bitcoin’s usage in developing countries
First, a quick thanks to you for reading this article! I hope you find this information interesting and informative. And with that said, let’s begin.
What is Hyperinflation?
The first step in answering our central question about bitcoin’s role in combating hyperinflation in developing countries is to lay out what hyperinflation is.
Let’s first start with defining inflation and why it often isn’t a good thing. Inflation measures the rise of prices in goods and services. In the United States, the Bureau of Labor Statistics measures inflation using the Consumer-Price-Index (CPI). The CPI is a measure of the U.S. Dollar’s purchasing power; when CPI is high, the USD’s purchasing power is low.
The Federal Reserve has aimed to keep inflation at around 2% historically and has done a decent job of doing that. Here’s a chart that shows inflation in the US over the last 25 years:
So following that quick refresh on inflation, let’s talk about hyperinflation.
Hyperinflation is inflation that’s 50% per month or higher. For perspective, a “high” inflation rate is often considered to be 5% or more. So, hyperinflation is abnormally high inflation, and is characterized by a rapid rise in prices. People living in countries experiencing hyperinflation can face extremely challenging financial circumstances.
This article from Investopedia gives a great example:
“In an environment of hyperinflation, prices may increase daily or weekly, which can have a dramatic impact on what consumers pay for basic necessities. For instance, imagine you always buy the same items at the grocery store. If the economy were experiencing a rising inflation rate of 5% per day, your grocery bill might rise from $500 one week to $675 the next week, then as high $911 the week after that.” – Investopedia.org
Hyperinflation forces people into dire economic circumstances.
And what causes hyperinflation? One usual suspect is excess money supply in a country’s economy, typically the result of a government printing money. Governments print money in order to stimulate economic growth and activity, but things get really dicey when governments print money and economic activity doesn’t keep up with that pace. The result? Financial chaos. Hyperinflation.
This is where Bitcoin gets very interesting…
Bitcoin and Hyperinflation
How does Bitcoin relate to the topic of hyperinflation? Quite significantly, actually. Here’s why.
Built right into the network’s DNA is scarcity, which is something I’ve written about a lot before, including in my most recent article.
Recall that the maximum amount of bitcoins that can ever exist in the world is 21,000,000. Once 21,000,000 bitcoins are created, the network will create no more. Thus, Bitcoin has a fixed money supply and a known future amount. Bitcoins are not limitless, or, in other words, they can’t be excessively printed by governments to the point where there is too much of them and not enough counterbalances, resulting in financial disaster like hyperinflation.
Bitcoins, of course, can’t be “printed” at all. Their supply cannot be regulated by an entity or government – a key quality of bitcoin that serves as a stark contrast to fiat currencies. This is why bitcoin is seen as an asset that combats hyperinflation: its planned supply and scarcity serve as deflationary measures. This is similar to how gold has been viewed and used for years.
For those curious, here’s a chart from Blockchain.com that shows bitcoin production over time.
As of this writing, 19,637,631.25 bitcoins have been created and issued. Once 21,000,000 have been created and issued, there will be no more production.
Bitcoin’s Usage to Combat Hyperinflation in Developing Countries
Is there a correlation between cryptocurrency adoption and hyperinflation rates? Developing countries are the countries that tend to experience hyperinflation due to their growth and other factors – is bitcoin (and cryptocurrency in general) utilized in those countries?
I thought if the answer was yes to these questions, that would indicate that there’s a strong probability bitcoin is used as a combatant to hyperinflation.
With that said, let’s have a look.
Here’s a chart from Statista that shows crypto adoption since 2019 (for those unaware, bitcoin is the #1 cryptocurrency in the world by a longshot).
Taking a look at the chart, a few key things stand out. First of all, 10 out of the 13 countries listed in the chart for high crypto adoption rates are considered developing countries (I used World Data’s website on developing countries to verify what a developing country is).
Developing countries and emerging markets typically experience higher inflation rates than other countries. According to another study by Statista, “in 2022, the average inflation rate in the emerging market and developing economies amounted to about 9.77 percent compared to the previous year.”
We know that an inflation rate above 5% is considered high, so these developing countries fall into the category of high inflation. Quite the interesting correlation that crypto adoption is highest in emerging markets…
Secondly, notice that Turkey had the second highest crypto adoption rate last year at 47% and Argentina had the seventh highest crypto adoption rate at 26%. What are the inflation rates of these countries? According to a recent article by Forbes, Turkey has a hyperinflation rate north of 60% and Argentina has a hyperinflation over 200%!
Hyperinflation in both countries. High crypto adoption (bitcoin) in both countries.
Conclusion
Based on the above, I think there’s evidence that bitcoin likely plays a role in combating hyperinflation for people in certain countries, especially emerging markets. While there are many factors not discussed in this article that could lead to crypto (bitcoin) adoption, I think the correlation between hyperinflation and crypto adoption – as well as the correlation between emerging markets and crypto adoption – are indicators that people across the globe use bitcoin to deal with the incredibly challenging circumstances of hyperinflation.
