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How To Use Crypto To Protect Ourselves From Inflation?

November 9, 2022
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Cryptocurrency and Inflation

We are sure that the inflation problem makes you think like everyone else. We may suddenly find ourselves investigating how to be minimally affected by inflation. As such, we have decided to give you useful information in this article. We are thinking ‘Which investments can I make to get rid of the effects of inflation?’ or ‘Is crypto really a tool to prevent inflation?’.

It’s a little hard to say how inflation will affect the cryptocurrency. This is because cryptocurrency as an asset has only been around for a little over 10 years. For most of this time, major economies experienced little significant inflation. Overall, the 2021/2022 inflationary push is the first-time investors have traded cryptocurrency in a period of significant consumer price increases.

You may have heard before that Bitcoin is designed to counter inflation. Now let’s take a brief look at what inflation is.

What is Inflation?

Inflation is characterized by currencies losing value over time and an uptick in the price of consumer goods. Owing to their limited supply, cryptocurrencies like Bitcoin generally experience low inflation rates. 

Inflation is usually identified as a sustained upward trend in the price of goods and services in an economy. It also corresponds to the economy’s currency losing purchasing power — meaning that it takes more and more units of currency to buy a certain amount of goods and services as inflation continues.

Inflation affects any product or service, including utilities, automobiles, food, medical care and housing. The prevalence of inflation in an economy affects individual consumers and businesses because it effectively makes money less valuable. In short, inflation reduces a consumer’s purchasing power, makes savings less valuable and delays retirement. Central banks around the world monitor inflation so that they can respond effectively. The U.S. Federal Reserve, for example, has a 2% inflation target. Should inflation rates rise beyond the intended target, the system adjusts its monetary policy accordingly to combat inflation.

Is Inflation Good or Bad for the Economy?

According to renowned economist John Maynard Keynes, inflation is not terrible in some cases and can actually stimulate the economy as well as create new jobs during downtime. We can say that; A low inflation rate encourages spending, investment, and borrowing necessary for healthy economic growth. On the other hand, when inflation gets out of control, it leads to hyperinflation, causing the prices of goods and services to rise sharply, while wages stagnate, purchasing power of foreign currency decreases, and living costs become more expensive.

Higher inflation erodes the value of the money you save, and lower inflation slows the economy as a whole. For example, citizens of hyperinflationary economies such as Argentina, Venezuela, and Zimbabwe must prioritize spending, otherwise price levels will skyrocket, causing the money in their savings accounts to depreciate.

Bitcoin Best Inflation Risk?

Since inflation has been a constant threat to the value stored in fiat, people often protect themselves by investing in assets that maintain their value over time. Crypto has become a popular investment vehicle in recent years.

Fears of inflation are manifested by economic contraction and government incentives that increase the global money supply. Bitcoin has positioned itself as an excellent hedge against inflation.

While the economics around the Bitcoin market is complex, some cryptocurrencies, including Bitcoin, are designed to resist inflation or experience predictable and low inflation rates. And while Bitcoin is generally heralded as a hedge against inflation, recent economic developments have seen Bitcoin performing less as a pure hedge.  

Largely driven by institutional investments, the cryptocurrency has become increasingly aligned with general market movements. This means that when the market goes down, Bitcoin likely goes down as well.

Consequently, when news of inflation strikes, the Federal Reserve will likely enact a dual mandate. Policy interest rates will go up, and there will be monetary tightening. As a result, assets (including crypto like Bitcoin) will see a price decline.

Crypto And Bitcoin’s Role During Inflation

Bitcoin is fundamentally a deflationary asset, which is why citizens of countries with unstable fiat currencies are increasingly using it as a store of value to protect against hyperinflation and rising costs of everyday goods and services. Unlike fiat, crypto can’t be manipulated to the same extent by changing interest rates and increased money printing. Most importantly, Bitcoin’s supply will never exceed 21 million which makes it an attractive store of value that is resistant to inflation.

Conclusion

Cryptocurrency as an asset class does not yet have a trading history during periods of inflation, so there’s no data-backed way of predicting how inflation will affect prices. However, investors can make some predictions based on the behaviour of other, similarly situated asset classes. Ultimately, while crypto can still be a risk during any market conditions it’s important to work with a financial advisor who has crypto experience if you need help determining when to invest.

The global nature and limited supply of bitcoin make it an excellent hedge against inflation. It is not controlled by any government or financial institutions. Therefore, it is not prone to economic measures that lead to inflation such as increasing currency supply through printing. In fact, the price proliferation of bitcoin as inflation increased during the Covid-19 pandemic, is enough evidence of its massive potential as a hedge against inflation. Suffice it to say, the cryptocurrency has positioned itself as a safe haven for investors with the rising inflation.

It would be rash to contend that cryptocurrency does not protect against rising inflation. True, the assertion that it hedges against inflation rests on scanty evidence. There has been little opportunity to test that claim, and when the opportunities have presented themselves, cryptocurrency’s performance hasn’t consistently supported the thesis. But neither has crypto been given the chance to fail. 

In summary, while it’s reasonable to suppose that cryptocurrency will help a portfolio survive inflation’s ravages, that plan is far from guaranteed. Buying Treasury Inflation-Protected Securities is a much safer approach, albeit potentially less lucrative.

Tips for Crypto Investing

You can use this link and consult your ideas to help you decide how to react during inflation spikes and listen our suggestions for your crypto investments and more. Cryptocurrency

 
 
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