Digital currency, often called cryptocurrency, facilitates online transactions using cryptographically secured systems. These virtual currencies can be used for a multitude of online purchases. But what motivates individuals to adopt such a system?
While some cryptocurrencies may be linked to the U.S. dollar, this is not a universal requirement. The value of these digital assets can be anchored to various benchmarks, creating a potential instability if that anchor is not a durable asset. Traditionally, currencies were backed by precious metals. In a historical example, post-WWI Germany curbed hyperinflation by securing its currency with government-owned properties. Throughout history, there have been alternative currencies such as wooden nickels or merchant scrip, redeemable for goods. A distinguishing feature of cryptocurrency is its independence from established banking institutions. This independence may offer increased user privacy, and potentially facilitate tax avoidance in some instances.
Privately issued currencies lack the security provided by centralized systems. There is no central bank offering stability. The increasing acceptance of these digital methods might gradually erode trust in physical assets.
Collectors of coins are well-versed in the concept of specie— coins composed of precious metals such as gold, silver, and platinum. These assets are tangible and physical. Cryptocurrencies, however, make no such claims to physical composition. Currently, the legislation advancing through Congress aiming to regulate the burgeoning cryptocurrency “industry” is a crucial area to watch. Proponents of a cashless society consider specie outdated, yet countries experiencing hyperinflation can attest to the consequences of unrestrained fiat money issuance.
Is cryptocurrency immune to inflation? Do not assume this to be true.