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Cryptocurrencies and Hyperinflation

The biggest danger of the cryptocurrency bubble is not speculator losses but hyperinflation. As the value of virtual currencies increases and they gain acceptance in commerce, the danger of hyperinflation that will damage economies worldwide is also increasing.

According to there are 747 mineable currencies in circulation with a total capitalization of about 112.5 billion USD.

The rise in capitalization turned parabolic in the last two month, rising from about 28 billion USD to current levels. That is an increase of more than 300% in a period of about 60 days.

If acceptance of cryptocurrencies for commercial transactions increases, there will be new money supply since no conversion to local currencies will be required. In practical terms, demand for goods will rise due to increased money supply linked to mining cryptocurrencies. As a result, prices will also rise.

We are talking about new money here that is not controlled by central banks and there is virtually unlimited supply of it. At some point their impact may surpass that of quantitative easing. This could create inflationary pressures and eventually even lead to hyperinflation if there will be no move to contain this phenomenon of using the internet as a tool of money creation, i.e., a money printing machine that only central banks are supposed to possess.

Central banks and regulators should react swiftly and protect the public from a new tulip mania and the economy from a rise in inflation caused by this new unlimited virtual money supply. Although the increased demand may cause higher prices, eventually inflation may grow out of proportions.

I view cryptocurrencies as a move to counter austerity and diminishing purchasing power from many years of failed central bank policies but an unbalanced stimulation of demand could have serious consequences.

In addition, a full scale adoption of cryptocurrencies with a simultaneous abolishment of the reserve currency status of the USD may create imbalances and mispricings in commodity but also in other markets. I do not believe the world has a mechanism in place to deal with a chaotic situation other than resorting to local and even global wars. Of course, we got to this point because of inability of the current system to maintain purchasing power without rising inflation. The result is that wealth concentration, inequality and poverty have increased. But resorting to a global cryptocurrency shock will  not solve these problems. Decentralization of money creation will not work without simultaneous decentralization of decision processes and resource allocation. In fact, just currency decentralization may increase inequality and wealth concentration.

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