Effective Bitcoin Inflation Rate Averages -35 Percent Per Year
|Llewellyn Jones||Mar 17|
Cryptocurrencies have seen huge growth in value and volume over the last few years as bitcoin and other investments have flourished in the financial world. The price of bitcoin has grown 221-fold since 2015.
Yet bitcoin has not made many inroads as a form of currency in retail. Few stores accept it in exchange for goods. Online retailers like Overstock.com and NewEgg that do accept Bitcoin only accept it at the current exchange rate to the dollar. Goods are listed in dollars and purchases are converted to bitcoin during checkout at the current market rate.
As a result, the effective inflation rate—the average change in value of the currency for a basket of goods—is extremely deflationary, averaging -35 percent a year over the last decade.
The price of a chair bought on Overstock.com in bitcoin is now 1/8th what it was a year ago. For anybody holding on to bitcoin, it's a bonanza. But it may help explain why the cryptocurrency has not caught on as an everyday currency.
The quickly increasing exchange rate between bitcoin and the dollar forces retailers to either repeatedly lower their prices by fixing them to the exchange rate, like Overstock and Newegg, or risk losing business because of the high cost of their goods.
For example, an online seller accepting only bitcoins that sells a chair at .01BTC in September of 2020, or $106.55 (Average exchange rate 10,655 $/BTC).
Since September, the exchange rate for bitcoin has more than doubled. If that seller doesn't fix the price to the dollar-BTC exchange rate and still asks .01BTC in 2021, they would be charging over twice the price for that chair. Based on March 2021 rates, that chair would now cost $592.67.
Tether, a company based on the idea of tethering the value of the cryptocurrency to the dollar owned by Ifinex, recently imploded when the attorney general of New York announced a court order accusing the company of fraud for misleading investors on losses and and assets. The company eventually settled with the state for 18.5 million.
While it may not be popular as a retail currency, bitcoin and other cryptocurrencies remain immensely popular as an investment and international transaction vehicle.
An analysis of trades by blockchain analysis firm Crystal Blockchain shows that the largest flow of transactions (inflow + outflow) go through the Seychelles with the U.S. second.