Cryptocurrency as inflation insurance: Evidence from household trading behavior
This paper, by Will Cong, Pulak Ghosh, Jiasun Li, Qihong Ruan, and Artem Streltsov, uses proprietary transaction data from WazirX, India’s largest cryptocurrency exchange (40.5 million transactions, January 2018–June 2022) matched with India’s Household Inflation Expectations Survey. The analysis employs Fama-MacBeth regressions and instrumental variable techniques, using current perceived inflation as an instrument to establish causality between inflation expectations and cryptocurrency investment decisions.
Findings
- Intensive margin (existing investors):
A 1 percentage point increase in one-year ahead inflation expectations is associated with an ₹1,149–₹1,283 increase in net cryptocurrency purchases per investor. This represents approximately 4–5% of India’s annual per capita income - Extensive margin (new investors):
A 1 percentage point increase in inflation expectations attracts 8–10 additional cryptocurrency investors per pincode (similar to zip code), translating to roughly 10,437 new investors nationally. - Cryptocurrency preferences:
Bitcoin (BTC) and Tether (USDT) drive the entire effect. Other cryptocurrencies show no significant relationship with inflation expectations. - Impact on inflation and economic implications
The research provides direct causal evidence that households adopt cryptocurrencies as inflation hedges rather than speculative assets. In particular, India’s high inflation (averaging 6.32% from 2011–2023) and strict capital controls limiting access to foreign currencies make cryptocurrencies an attractive alternative to traditional hedging instruments. The relationship remains significant even after controlling for speculative motives (expected cryptocurrency returns). Finally, the effect is significantly stronger in urban areas compared to rural regions.
Inflation Expectation and Cryptocurrency Investment
Authors: Will Cong, Pulak Ghosh, Jiasun Li, Qihong Ruan, Artem Streltsov
From: Nanyang Technological University, Indian Institute of Management-Bangalore, George Mason University, Cornell University, SUNY-Buffalo
How stablecoins reshape global finance
This paper by Marina Azzimonti and Vincenzo Quadrini, develops a three-country general equilibrium model (U.S., Rest of World, Digital Economy) where cryptocurrency serves as a productive input under Proof-of-Stake validation (one of the two most common protocols for validation of transactions) and Stablecoins are issued as dollar-pegged liabilities. The model uses an epidemic-style adoption mechanism to capture how agents gradually embrace the Digital Economy, with simulations calibrated to 2023 baseline data (Stablecoin market cap of $220 billion projected to reach $2 trillion by 2028). Their findings include:
Long-run effects:
The financial demand channel dominates: Stablecoin expansion increases demand for dollar-denominated safe assets (required for reserve backing), leading to:
- Lower U.S. interest rates
- Higher U.S. foreign borrowing
- Riskier financial portfolios globally
Consumption volatility:
U.S. idiosyncratic consumption volatility increases over the transition, suggesting greater inflation uncertainty for household purchasing power. Rest of World volatility decreases, implying more stable purchasing power in emerging markets benefiting from dollar-denominated Stablecoin alternatives.
Impact on inflation
- Reserve demand effect: Dollar-backed Stablecoins increase demand for U.S. Treasuries, creating downward pressure on U.S. interest rates and disinflationary effects. Projected growth to $2 trillion would require around $1.6 trillion in additional dollar asset holdings.
- Monetary policy and emerging markets: Stablecoin adoption facilitates digital dollarization in high-inflation emerging economies, reducing domestic monetary policy effectiveness and currency control.
- Dollar dominance: With 80% of Stablecoins backed by dollar reserves, expansion strengthens the dollar’s role as global reserve currency, supporting lower U.S. inflation expectations and favorable borrowing rates.
- Global safe asset supply: Stablecoins provide emerging market savers accessible dollar-denominated stores of value with lower transaction costs, alleviating the global safe asset shortage. The mechanism operates primarily through financial markets and interest rates rather than direct price-level effects, with heterogeneous implications across countries.
Digital Economy, Stablecoins, and the Global Financial System
Authors: Marina Azzimonti, Vincenzo Quadrini
From: Federal Reserve Bank of Richmond, University of Southern California
