Investors are always looking for ways to protect their money from inflation. Inflation is a slow, gradual process that occurs when the government prints more currency over time to pay for its expenses and debt load. Gold has been used as an investment hedge since ancient times because it’s tangible and doesn’t have any physical value tied up in printing presses or other forms of monetary supply management.
The “how to hedge against hyperinflation” is a question that many investors have been asking. The best way to hedge against inflation is by investing in stocks, bonds, commodities, and real estate.
Bitcoin (BTC) was founded in the aftermath of the 2008 financial crisis with the intention of addressing the issues caused by loose monetary policy. Satoshi Nakamoto, the cryptocurrency’s founder, said in late 2008 that the quantity of the cryptocurrency rises “by a predetermined amount” that “does not necessarily result in inflation.”
The cryptocurrency’s inflation rate has been set, and its circulation supply has been set at 21 million coins, with the remaining coins projected to be mined by 2140. BTC’s inflation rate will be zero by then. Fiat currencies, on the other hand, have an infinite supply and may be issued to change monetary policy.
An expansionary monetary strategy, such as the one implemented by most nations throughout the globe during the past several years, strives to increase the money supply by decreasing interest rates and allowing central banks to participate in quantitative easing.
This loose monetary policy has long been thought to contribute to increased inflation, which is defined as the depreciation of a payment instrument when the cost of goods and services rises. In November, US inflation hit a 30-year high, while inflation in the Eurozone hit its highest level in the 25 years that data has been collected.
Cointelegraph contacted a number of industry professionals for their thoughts on these data, and almost all of them blamed expansionary monetary policy. Chris Kline, the chief operations officer and co-founder of crypto retirement platform Bitcoin IRA, told Cointelegraph that inflation isn’t going away and that individuals need to “find an alternative to secure their investments.”
While gold and real estate were once good investments, real estate prices are now “off the charts,” and gold is “inaccessible to the typical American,” according to Kline. Bitcoin has now been included to the “inflationary hedging mix” since its supply cannot be manipulated in the same way that fiat currencies’ supply can.
Martha Reyes, director of research at cryptocurrency exchange Bequant, told Cointelegraph that the market rapidly responded to the fresh inflation numbers by pricing in the possibility of central bank interest rate rises. According to Reyes, the “fundamental reason of these high inflation readings is a substantial rise in money supply, since the epidemic resulted in billions of dollars of additional money being generated.”
Gold has traditionally been used as an inflation hedge. Bitcoin and other cryptocurrencies have been dubbed “gold 2.0” because they exhibit qualities that suggest they may be a digital counterpart of the precious metal.
Cryptocurrency as an anti-inflationary tool
Cryptocurrencies are notorious for their high volatility, with even blue-chip crypto assets seeing 50% drops in a matter of minutes. Because of this volatility, many people are asking if Bitcoin and other cryptocurrencies can be used as an inflation hedge.
In a memo to clients, analysts at Wall Street firm JPMorgan indicated that a 1% portfolio allocation to Bitcoin may act as a buffer against conventional asset class swings. Billionaire billionaire Carl Icahn has also backed BTC as an inflation hedge.
Adrian Kolody, the creator of non-custodial decentralized exchange Domination Finance, agreed with Kline that Bitcoin is a solution to inflation, but added that there are other methods to hedge against inflation in the cryptocurrency ecosystem.
The decentralized finance (DeFi) sector, according to Kolody, is a feasible alternative. He said that investors may “outpace inflation” while avoiding the “risks of a spot position” by employing stablecoins — cryptocurrencies with a price control mechanism — and decentralized apps (DApps). To do so, all they’d have to do is discover a means to collect interest on their stablecoins that is higher than yearly inflation rates. Kolody explained:
“The easiest way to think about it is that crypto allows you to take control of your money in a number of ways rather than relying on the federal government.”
Bitcoin is “more desirable as a store of wealth than other assets such as commodities,” according to Reyes, since increased demand can only be fulfilled by higher prices, not by greater supply.
The cryptocurrency is in a “early stage adoption phase,” according to the exchange’s director of research, which means it “does not tend to have consistent correlations with other assets, and its price increase should come from halving cycles and network expansion.”
As a result, Bitcoin is more “resilient to economic downturns,” she said, “however in a major market selloff, it would definitely be hurt initially as some investors pare holdings across the board.”
Bitcoin seemed to demonstrate its potential as an inflation hedge earlier this month when it achieved a new all-time high in Turkey while the country’s official currency, the lira, plummeted. Others argue that Turkish citizens would have done better to invest in gold.
Utility and liberty, or an heirloom?
Bitcoin has outpaced gold so far this year, with a gain of 94 percent since the beginning of the year. Gold, on the other hand, has decreased by almost 8% during the same time period, indicating that investors who gambled on the precious metal to hedge against inflation have so far been disappointed.
In Turkey, the precious metal performed precisely what it needed to do in the near term: it preserved people’s purchasing power by preserving its value while the lira plummeted. It even outperformed BTC in lira terms over the previous 30 days.
Zooming out, it’s evident that BTC was a lot better investment than gold, having risen 270 percent against the fiat currency so far this year vs 70 percent for gold. Data reveals that investors would have been better off betting on gold as the crisis worsened, but that BTC would have been a superior investment in the long term.
Kolody claimed that a “Bitcoin and crypto standard” is a superior alternative to a fiat currency or the gold standard than a fiat currency or the gold standard as an inflation hedge, noting that being trustless and permissionless helps crypto stand out.
This, he claims, permits crypto and DeFi structures to be as strong as they are because investors “don’t have to worry about a political leader” who can “nuke” their money’s worth by “just throttling the system.” While he considers gold to be an adequate inflation hedge, he considers BTC to be “the unambiguous choice:”
“When deciding whether to invest in BTC or gold as an inflation hedge, investors should consider if they desire utility and independence from their hedge or a legacy asset.”
It’s worth mentioning, according to Karan Sood, CEO and managing director of Cboe Vest, an asset management partner of Cboe Global Markets, that Bitcoin’s young history has “cut both ways in the past,” with “periods when both Bitcoin and inflation have grown and dropped in tandem.”
Bitcoin’s intrinsic volatility, according to Sood, has the ability to amplify these movements. For instance, if present inflation levels prove to be ephemeral and decline from their highs, Bitcoin “may likewise collapse suddenly, exposing investors to huge potential losses,” he warned.
Sood proposed that investors wishing to utilize Bitcoin to hedge against inflation may “benefit from gaining Bitcoin exposure through a strategy that aims to control the volatility of Bitcoin itself” as a solution.
Yuriy Kovalev, CEO and creator of crypto trading platform Zenfuse, told Cointelegraph that although the lira’s freefall might have meant investing on gold was a smart decision for Turkish investors, it wasn’t for US-based investors:
“Gold has underperformed this year, falling 8.6% versus the dollar while the CPI in the United States increased by 6.2 percent.” Gold has disappointed bettors, while Bitcoin has risen 92.3 percent year to far, rewarding those who saw it as a hedge.”
Investors may “want gold in their portfolio for diversification considerations even if it has not done well this year,” according to Reyes, even though Bitcoin delivers greater returns as assessed by the Sharpe ratio.
A diverse portfolio may be a better way to hedge against inflation for more cautious investors, given it’s unclear how Bitcoin’s price will react if inflation continues to rise.
A muddled reality
It’s unclear if Bitcoin and cryptocurrencies in general are a superior alternative to the present financial system. A “balanced blend of both systems is what we should be looking for,” according to Stephen Stonberg, CEO of crypto exchange Bittrex Global. According to Stonberg:
“Both models have merits, but if we want to reach the world’s unbanked, Bitcoin and the whole digital asset sector need to be progressively incorporated into the existing financial system.”
When it comes to Bitcoin working as an inflation hedge, Caleb Silver, editor-in-chief of the financial information site Investopedia, told Cointelegraph that the “reality is murky.”
Bitcoin, according to Silver, is a relatively new asset when compared to classic inflation hedges such as gold or the Japanese yen, and although it possesses characteristics that are “essential elements in its perception as an inflation hedge,” its violent price fluctuations make it unreliable.
Investors should remember the market’s volatility throughout the last decade, according to him:
“It has gone through 20 bear markets in the last 10 years, with a 20% or larger fall for approximately 80% of its existence.” Until the epidemic, consumer prices had been very stable throughout the previous decade.”
Despite institutional investors’ adoption of Bitcoin for more than two years, Silver described it as a “very speculative asset.” He finished by adding that the fact that most market players do not see Bitcoin as a store of value “hurts its credibility as an inflation hedge.”
Investors have a variety of options for hedging against inflation, including Bitcoin. Only time will tell what will and will not work, therefore for certain investors, a diverse portfolio may be the best option. According to our experts, they have BTC, gold, and even DeFi protocols at their disposal to help them outrun inflation.
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“Best investments for inflation 2021” is a question that many investors are asking themselves. There are many ways to hedge against the effects of inflation. Reference: best investments for inflation 2021.
Frequently Asked Questions
How do investors hedge against inflation?
A: If a company is highly exposed to inflation, they would try and hedge against it by investing in different assets that are not as affected.
How do investors deal with inflation?
A: Inflation is a decrease in the overall price level of goods and services. It occurs when the general purchasing power of money decreases, leading to an erosion in the real value of currency that makes it increasingly difficult for consumers to maintain their standard of living
What investments do well during inflation?
A: One investment that has historically performed well during inflation is real estate. As long as the economy continues to grow, a person will be able to recoup their initial investments in property and have enough left over for themselves or others through rent payments.
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