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Ask CryptoVantage: Are Crypto Investments a Good Inflation Hedge?

Crypto proponents swear by their favorite currency being a bastion against inflation. Before Bitcoin, people only knew that money was issued by the government and its supply and interest rates were up to the Reserve or Central Bank.

So when Bitcoin came with an encoded and controlled supply mechanism, it was an entirely new way to put a leash on a currency’s supply. With it came an almost fabled ability of cryptocurrencies to hedge off inflation.

Indeed, crypto investments can achieve this feat — but it’s not that straightforward. Cryptocurrencies are prone to dramatic price oscillations that complicate their otherwise simple pitches.

In this edition, we’ll explore one of the most debated propositions of cryptocurrencies and what that means if you want to cushion your savings against inevitable inflation.

Can crypto stop the money vacuum that is inflation?

Why Do People Say Crypto Investments Are An Inflation Hedge?

This idea sprouts from Bitcoin, the pioneer cryptocurrency, having a hard-capped supply of 21 million. That means that there will only ever be 21 million coins in existence, making Bitcoin scarce over time.

That quality alone is one of Bitcoin’s most valuable propositions. While the Fed and central banks worldwide print more money and purchasing power is diluted, Bitcoin’s supply remains the same. Bitcoin’s supply mechanics avoid this scenario and is “deflationary” in that sense. For this reason, Bitcoin has earned itself the name “digital gold.”

This point of view has only gained more traction after endorsements by high-profile institutions such as Goldman Sachs extolled BTC as a store of value. It has further been bolstered after huge companies, including Microstrategy, MassMutual, and Tesla added BTC to their balance sheets.

There are legit arguments against crypto as an inflation hedge however.

The Case Against Crypto as An Inflation Hedge

When it comes to crypto and inflation, some industry observers are almost usually waiting with bated breath to declare, “I told you so.” This was and continues to be the case during Covid-related inflation which the Russia-Ukraine conflict has only heightened.

Through all this, the referendum has been that crypto investments, which are supposed to stay above the fray (of depreciating fiat currencies and traditional assets), have not stepped up to the plate.

Even the case of cryptocurrencies being “digital gold” doesn’t appear to hold so much water, with real gold outdoing Bitcoin at the time of writing. A time like this last year was the peak of crypto — with NFTs exploding, traditional institutional investors taking the plunge, and the pioneer cryptocurrency reaching its zenith of $68,000. Fast forward, BTC has corrected by more than a staggering 60% while gold’s price has only sunk by 5%.

It doesn’t help that the crypto market appears to be mimicking traditional stocks in market behavior. The question becomes: Isn’t crypto — a disparate asset class, supposed to have unique market movements? How, then, is it deflationary if it moves in tandem with stocks?

Counterpoint: Look at the Long-Term Value

Crypto has not failed as a hedge against inflation, even right now when it’s bleak and there’s “blood on the streets.” At any given “worst” moment for Bitcoin — and November 2022 qualifies as one — there’s a traditional currency somewhere that’s doing worse, and there are users who, for them, BTC is a reprieve.

Additionally, while gold’s flipped strongly against cryptocurrencies for now, the king of crypto and other prominent cryptocurrencies have shown gold dust consistently in the long term. Bitcoin is up by more than 400% over the last five years, compared with a paltry 38% for the precious metal. Gold might be on a more level-headed trajectory, but it can’t hold a candle to crypto in the long haul.

Inflation Hedge Or Not: The Choice is Yours

Ultimately, the debate on whether cryptocurrencies make a fine inflation hedge comes down to the individual. While we’re all participating in the financial revolution, our expectations and experiences differ. For instance, someone in hyperinflation-rocked Zimbabwe or Venezuela might use crypto to secure more purchasing power.

Others might put their money in crypto, which they then HODL. In crypto, HODL is not just a drunken typo but an investment approach that lets cryptocurrency investors “hold on for dear life,” i.e., ride out the exhilarating swings of the crypto market without throwing in the towel. The HODL strategy has proven rewarding to long-term investors with “diamond hands.”

HODLing leverages the notorious volatility of the crypto market. For instance, Bitcoin can fall to the wrong side of the zeroes only to surge to historic highs overnight. HODLers are usually poised to gain massively when a currency behaves in the latter fashion.

For example, Bitcoin zoomed from $15 in January 2013 to upwards of $1,100 later in December — a rise of over 7,000%. It also set record highs in December 2017 and December 2021, respectively.

HODLing is a means to hedge off inflation and preserve wealth by putting your money in a currency that doesn’t play by the rules of the financial establishment.

Whatever the cause of inflation: geopolitical issues, the money printer going brrrrr, or demand outstripping supply, your money that’s in Bitcoin is money that’s safe from devaluation (at least in terms of coin issuance).

Hedging Against Inflation With DeFi 

It’s not just the speculative nature of crypto that makes it a powerful hedge against inflation. The space has given rise to decentralized finance (DeFi) — the belief and the system that anyone anywhere with internet connectivity should have access to financial services. The premise of DeFi is that, unlike banks and other traditional financial outfits, you don’t need a perfect credit history or an ID to access services.

DeFi allows you to do these and more:

  • Stake crypto and earn interest via yield farming 
  • Borrow money at reasonable interest rates to carry out arbitrage and make a profit
  • Invest in DeFi stocks

Traditional financial instruments are notorious for their meager returns; on top of that, you have inflation eating into them. DeFi offers respectable yields that are inflation-resistant as a bonus.

If we’re looking at DeFi and the long-term prospects of crypto investments, then yes, there is still an argument they can act as a good inflation hedge.

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Hope Mutie

About the Author

Hope Mutie

Hope Mutie is a professional writer and editor whose interests include fintech, cryptocurrency, and blockchain. She engages with crypto audiences by curating content that’s fun-to-read, educational, and offers unmatched value. Hope is part of the brilliant team at Go Full Crypto – a podcast and service that enables your transition into crypto.

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