How PPS explains the behavior of cryptocurrency investors in different countries

Key Points

• The purchasing power parity (PPP) indicates the real value of currencies by comparing the prices of identical goods in different countries.
• PPS helps identify which regions people are most interested in cryptocurrencies and stablecoins as a means of protection against devaluation.
• The PPP indicator is used by organizations such as the IMF and the World Bank for an objective assessment of the economic development of countries.
• In countries with weak currencies, digital assets are becoming a hedging tool against inflation.

Why Purchasing Power Parity is Important for the Crypto Community

The standard exchange rate often misleads. The official price of a currency may not reflect a person's real ability to buy something in their country. This is where the concept of purchasing power parity comes into play — a tool that helps understand how much money actually “works” on the ground.

The PPP compares the cost of a typical set of goods and services (food, clothing, housing, utilities) in different locations. If the same set costs less in India than in America, it means that the Indian rupee has a higher real value for the local resident. Economists call this the law of one price — under conditions of open borders, an identical good should cost the same (taking into account exchange rates).

Mechanism of operation: from Big Macs to investment solutions

The simplest example of PPP is the Big Mac index published by The Economist. The McDonald's hamburger is roughly the same in all countries, making it ideal for comparison. If a Big Mac costs $5 in the USA and $3 in India, it signals a difference in the purchasing power of the currencies.

Similarly, the indices for iPad, KFC, and other mass-market products work. However, professional economists use a more complex approach — they analyze an entire basket of goods to exclude random fluctuations.

The formula is simple: if a phone costs $500 in the USA and 55,000 yen in Japan, then according to PPP, the exchange rate should be about 110 yen per dollar. In practice, it may differ due to taxes, transportation costs, demand, and speculation, but in the long run, exchange rates tend to move towards PPP values.

Why cryptocurrencies are in demand in countries with weak currencies

Here is where the most interesting part begins for crypto investors. PPS shows where people are most vulnerable to currency devaluation and inflation. In such countries, the demand for Bitcoin and stablecoins sharply increases.

Scenario 1: country with high inflation In a country with a history of hyperinflation, the local currency loses purchasing power. PPP shows that income remains the same in nominal terms, but the real ability to purchase goods decreases. People start converting their savings into Bitcoin or stablecoins pegged to the dollar to preserve the real value of their money.

Scenario 2: Developing Economy with Currency Control Governments sometimes artificially inflate the official exchange rate to appear more economically strong. PPP instantly reveals this manipulation. Citizens quickly realize that the official rate does not reflect reality and seek alternatives. Cryptocurrencies are a natural choice.

Scenario 3: region without access to dollars In some countries, it is difficult to obtain currency accounts in dollars or euros. Stablecoins fill this gap by providing people with access to a stable store of value through the Internet.

PPS as a tool for analyzing GDP and living standards

The International Monetary Fund and the World Bank use PPP-adjusted GDP for a fair assessment of economies. Take India: its nominal GDP per capita looks meager at the usual exchange rate, but when adjusted for PPP, the figures are much higher, as the cost of living there is significantly lower.

This has direct implications for the crypto markets. GDP per capita, adjusted for purchasing power parity (PPP), correlates with the likelihood of crypto adoption in the region. Countries with low absolute GDP per capita but high GDP per capita in PPP often show increasing interest in digital assets.

Real Problems of PPS and Their Impact on Forecasts

The PPS is not perfect. The main problem is the difference in the quality of goods. A product may be more expensive in one country not because the currency is weaker, but because the product is of better quality. Comparing prices for “identical” items is often not entirely fair.

The second problem is non-tradable goods. Services such as hairdressing, medicine, or home repairs are not sold internationally, so their prices vary greatly locally and are difficult to compare.

The third difficulty is the time factor. Inflation changes, and PPP calculations made six months ago may already be outdated. PPP assumes relative stability, but this does not work in volatile economies.

Despite these limitations, PPS remains the best publicly available tool for understanding the real value of currencies.

Long-term forecasts and currency arbitrage

Economists use PPP to predict currency exchange rate movements in the long term. Rates can fluctuate due to politics, speculation, stock markets, but over time they gravitate towards PPP values. This principle helps traders build currency arbitrage and hedging strategies.

Why This Matters to Investors

Understanding purchasing power parity helps:

• Identify promising markets for crypto adoption — regions with weak currency ( in PPP ) often show high demand for stablecoins.
• Predict currency volatility — when the nominal exchange rate significantly differs from PPP, it is a signal of instability.
• Assess real income in different countries — the nominal salary may be low, but when considering PPP, life can be quite comfortable.
• Plan for diversification — investors can choose assets based on the real purchasing power of currencies from different countries.

In short, purchasing power parity is not just a boring economic indicator. It is a lens through which one can see the real interests of people in cryptocurrencies and understand where digital assets will grow the fastest.