Although cryptocurrencies are destined to experience ups and downs, they are here to stay and will undoubtedly continue to grow in the future.
Can cryptocurrencies act as a protective asset against inflation?
Most experts agree that central banks will continue to maintain low interest rates as well as powerful monetary stimuli. This is because the world will be facing numerous crises in the coming years. Conflicts, wars, environmental issues, pandemics, and all sorts of problems are already here and will become more pronounced as years wear on.
It’s not just crypto enthusiasts who are seeing Bitcoin as an anti-inflation asset. There are also big players betting on this idea. Large hedge funds are accumulating Bitcoins and other cryptocurrencies to minimize the negative impact of such monetary policy as well as to bring profitability to their clients. They know that inflation will eat into their money. It will eat into your money as well.
The opinion that cryptocurrencies are used as a defensive asset is indeed not unfounded. Bitcoin has the key qualities of a defensive asset — its value is guaranteed by the scarcity of emission, it can be exchanged for goods or services, and it has growth potential.
It should be noted though that the cycles of the crypto market are not completely independent from the cycles of the traditional financial market. With the rise in global inflation, the price of Bitcoin and other cryptocurrencies will also experience setbacks. Additionally, some restrictions are imposed on the cryptocurrency by its controversial legal status.
Despite all the problems, crypto is growing. El Salvador has adopted BTC as official currency. The mayor of New York wants to receive the salary in Bitcoin. Tesla and MicroStrategy are purchasing Bitcoins. Then we have Elon Musk’s tweets about cryptocurrencies. Even the largest central banks are increasingly thinking about launching their own digital currencies.
What does all this mean? It means that digital currencies will continue to expand and develop despite legal and economic issues.
If we consider investment periods of four years, there is a high probability that cryptocurrencies will not only protect against inflation but will also yield much higher earnings than what hedge funds and the market indicate at the moment.
Of course, one has to keep in mind that crypto is highly volatile, but fiat money will also become less reliable as the world faces serious challenges that are likely to be much worse than what we’ve witnessed in the past few years.
The world political order is changing, environmental problems are accumulating, the work market is undergoing serious changes … things will get much more demanding in the next few years and fiat money will be less and less dependable.
The cryptocurrency market is quite young and cyclical — approximately every two years, the market trend changes, after growth, a serious drop of 50–70% usually follows, and then the crypto market grows again. This means that the best time to invest in crypto is when the big drop happens. It also means that one should consider crypto as a long-term asset and should expect ups and downs.
If Bitcoin and other digital currencies are so volatile, how can they protect my equity from inflation?
Let’s look into Bitcoin.
Bitcoin was already born with the premise that it would be a scarce asset by nature. Its creator, Satoshi Nakamoto, predicts the end of Bitcoin mining when it reaches the mark of 21 million units.
Even before the mark is reached, the protocol foresees reductions in the volume of issuance every four years, in a process known as “halving.” The last one was in May of last year — and this is one of the factors that explains the rise of Bitcoin. It is this “rule” that provides for the reduction of Bitcoin emissions that drew the attention of the asset to its potential to protect against inflation.
Inflation is a concern that has returned to the spotlight this year not only in some countries but worldwide. It gained strength in the face of currency issuance by monetary authorities to boost their economies amid the Covid-19 crisis, in addition to other stimulative policies, such as lowering interest rates.
It’s that classic law of supply and demand. There is more currency in the square, so its “value” is lower. And the erosion of the value of a currency is nothing more than inflation. The same “money” is worth less. If this concept is too abstract for you, just think about how much you bought with $100 at the supermarket last year and how much you buy today with the same $100.
But in the case of Bitcoin, the trend is the opposite. As the supply of Bitcoin was reduced in 2020, its value tends to be higher. And, up ahead, there is a further reduction forecast, so it is a medium to long term trend.
The difference between cryptocurrencies and fiat currencies is that they are neither issued nor regulated by central banks and therefore are not subject to any country’s monetary policies.
This characteristic of being an inflation-immune asset was even one of Satoshi’s proposals for the currency. And little by little the market is seeing this. Nasdaq itself, in a publication, stated that the recent highs of BTC may have been driven by the use of crypto as an anti-inflation hedge:
“Bitcoin was built to serve as a trustworthy store of inflation-proof value and provide an alternative to fiat currencies, whose supply is controlled by governments and central bankers and therefore are subject to wild inflationary periods.” (Source: Nasdaq.com)
Gradually, cryptocurrencies are gaining credibility in the market. They are becoming an important asset in the investor’s portfolio. With inflation knocking on the door, cryptocurrencies are beginning to take over the position once reserved for gold and hard currencies.
So, can you use cryptocurrencies to protect your wealth against inflation? The answer is yes. However, as with any asset, smart management is a must.
Keep in mind that not only Bitcoin can be used as an asset against inflation. Ethereum, Tether, Binance Coin, Solana, Dogecoin, and different DeFi tokens and altcoins should also be considered.
Note: This article is for informational purposes only. The statements in this article represent my own views and assessments. Before investing in cryptocurrencies, I suggest you contact legal and financial experts so you could gather as much relevant info as possible.