People hold stablecoins to gain liquidity in crypto market and to hedge against global inflation. Due to the current economic system, the world is facing challenges from inflation. Central banks were given the ability to conduct quantitative easing unlimitedly which leads to higher inflation rates and cost of living. In June 2022, the Consumer Price Index (CPI) reached 9.1% (over past 12 months) in the US. This increase was the largest CPI increase in the past 40 years. The Federal Reserve has to take actions to cool down the market, raising interest rates is one of the approaches. In this article, we will explore more about the role of stablecoins in inflation.
Implication of Higher Interest Rate
With higher interest rate, it is more expensive for businesses and individuals to take out a loan, such as mortgage loans. The average fix rate 30-year mortgage rose to 6.02% which is the first time above 6% ever since the 2008 financial crisis. To illustrate more, it is very likely the housing prices will drop in the near future and people who bought a house in recent years might suffer from the loss of housing prices.
Additionally, countries that import goods and products from the US suffer from the rise of US dollar value, including paying a premium and worsening inflation.
Why stablecoins can help you hedge against inflation?
A stablecoin is a type of cryptocurrency whose value is frequently tied to an asset or controlled by an algorithm to keep it stable. There are several benefits of stablecoins thanks to blockchain technology:
- Without limitations of countries. You are able to send or receive stablecoins across borders, even if you don’t own a bank account. Understand that there are plenty of people in the world are not eligible or cannot afford to open a bank account.
- Liquidity. You can exchange your stablecoins to US dollars or your desired currencies easily.
- Fast transaction. Compared to current banking system, blockchain technology allows people to transfer their fund faster and at a lower cost.
A Fun Fact & Closing Thoughts
In 2021, El Salvado became the first country adopted Bitcoin as their second official currency – after they adopted US dollar due to hyperinflation. Holding stablecoins may be handy in terms of hedging against inflation and other financial activities, yet provides greater liquidity of your assets.
