What you need to know about cryptocurrency and rising inflation

Here’s what investors, experts, and everyday Americans gathered around the dinner table are saying about inflation.

U.S. inflation rates reached a 40-year high in February,¹ and there's a growing consensus among experts that inflation is currently a key threat to the economy.²

President Joe Biden acknowledged this consensus in his State of the Union address on March 1, saying: "Too many families are struggling to keep up with the bills. Inflation is robbing them of the gains they might otherwise feel."³

These inflation concerns leave people with many important questions: What's causing inflation? Is it only temporary? If not, how am I going to change my spending plan? How am I going to change my savings plan?

Here’s what investors, experts, and everyday Americans gathered around the dinner table are saying about inflation, and how a role for cryptocurrency is becoming an interesting part of the conversation.

What's causing inflation?

There are a number of reasons for rising prices, many of them with roots in the COVID-19 pandemic. Expansionary monetary policy during the pandemic increased the U.S. money supply by 40% over two years.⁴ Continuing supply chain disruptions led to high consumer demand that at times outpaced supply.⁵ As if that weren't enough, the Russian invasion of Ukraine led to increasing oil prices, just when many Americans were starting to leave their houses and fill their gas tanks.⁶

For a time, officials like the Fed's Jerome Powell argued that inflation was transitory.⁷ However, upward pressure on prices now appears to be more than just temporary, with the Fed admitting in December 2021 that 'transitory' was no longer an accurate descriptor when talking about inflation.⁸

Americans are paying attention and are changing their behavior accordingly by reducing spending. In the last year, 63% of Americans have reduced spending on dining out at restaurants, 56% reduced spending on entertainment, and 51% reduced spending on travel. In addition to these changes in discretionary spending, nearly half of Americans have also been forced to cut back on essentials like clothing and groceries as they look for ways to cut back on bills.⁹

When those bills do arrive, Americans are putting off paying them; nearly one in five Americans have delayed payment on a credit card bill in the past year as a result of rising inflation.¹⁰

How is crypto part of the inflation conversation?

Changes to spending are certainly an important consideration during times of high inflation, but spending is only half of the battle. The other half is considering the best ways to save and invest money in a way that stores value. If your investments are growing at rates that are lower than inflation rates, you're effectively losing purchasing power—even if the number on your balance sheet is growing.

That's where crypto comes into the conversation.

During times of uncertainty, investors often flock to gold, which has both inherent value as well as fixed supply (governments may be able to print more money, but there's only so much gold out there).¹¹ But when it comes to seeking out "store of value" investments, there's another player in town these days: bitcoin.

In an October 2021 note shared with investors, JPMorgan shared that “Institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold," Fortune reported.¹² And in January 2022, Goldman Sachs reported that bitcoin had already captured 20% of the "store of value" market.¹³

Is bitcoin the new gold?

The comparisons to gold highlight a key similarity between bitcoin and the precious metal: like gold, bitcoin has a fixed supply. It's capped at 21 million bitcoin. (Other cryptocurrencies have an unlimited supply, which may be why professionals talking about using cryptocurrencies as a store of value often specifically reference bitcoin). It's also borderless and has no centralized control.¹⁴

However, some professionals are quick to point out that bitcoin is also different from gold in many ways. For one thing, bitcoin's historical price record is much more volatile. A UBS report notes that adding bitcoin to a portfolio between 2016 and 2020 would provide higher returns, but also much greater volatility.¹⁵ Individual investors would have to evaluate what type of volatility profile they're comfortable with.

What do everyday investors think?

No matter the conclusion, it's not just experts that are talking about cryptocurrency as a "store of value" investment.

Forty percent of people who own cryptocurrency said that rising inflation significantly or somewhat increases cryptocurrency's appeal, and 48% of U.S. gig workers say inflation has made them more open to getting paid in crypto.¹⁶

It may not be the right move for everyone, but it's clear that when it comes to "store of value" investments, bitcoin certainly has a place at the table.