Can cryptocurrencies become a hedge against inflation?
Can Cryptocurrencies Become a Hedge Against Inflation?
Cryptocurrencies are once again grabbing the spotlight with Bitcoin leading the price recovery back to its ATH levels. The bull market is fueled by institutions that buy Bitcoin with their cash reserves in order to protect their wealth and escape the claws of inflation.
But what exactly is inflation anyway? Our article will delve into the topic and try to help you understand how cryptocurrencies can provide a viable solution to a problem that is becoming increasingly important. Ready to delve in? Let’s get started!
The process of inflation is as old as our modern FIAT currency. Since way back in 1971, when President Nixon announced that the US dollar will no longer be backed by gold, people had to trust the government for the value of their money.
Here, however, comes a significant problem – governments keep printing money, which “inflates” the total supply of it in the market. With more money being available, the value of each dollar drops over time. On average, the value of money decreases by 1,04% each year. You might have already noticed that when comparing the price of something with a few years back and being surprised by the slight “bump” in value.
In times of economic uncertainty, inflation rates increase due to excessive money printing. We saw this back in 2008 when a global financial crisis led to abnormal money printing practices.
Are you starting to get a full picture here? The pandemic-related lockdowns caused by COVID19 led to quantitative easing measures that were unprecedented. More than $10 trillion dollars were injected into the economy to bail out large corporations and create the stimulus checks that were airdropped to the public.
Due to this massive growth of our monetary supply, the value of all FIAT currencies is expected to drop in the next few years. And with banks offering near-zero interest rates, the drop will cause a loss of value to anyone holding onto cash. This is where cryptocurrencies come in.
Cryptocurrencies are Immune to Inflation
Cryptocurrencies with a hard-capped supply and specifically Bitcoin (due to its decentralized nature) is seen as a great solution to protect one’s funds from inflation. The popular cryptocurrency is built to increase in value over time, by gradually decreasing the release of new coins (bitcoin halving) and having only 21.000.000 units in total.
Due to these features, Bitcoin has become the go-to option for many people who fear a global financial collapse, which would cause states of hyperinflation. Those are already seen now in Venezuela, where the value of money has become so low that people measure it by weight instead of its representation on paper.
What Does This Mean for the Future?
Stores of value are most commonly used to make a profit in a longer period of time. At least that’s why most people buy gold for if you go around asking them. But there is much more to uncorrelated assets than “making money”.
By investing your savings into assets that are nearly guaranteed to increase in value in the long run, you obtain freedom from the current financial system. This freedom is now starting to take the form of Bitcoin, and many influential people make sure to point this out as well.
By investing in Bitcoin and other stores of value with a limited supply, you ensure your safety from a potential collapse in the global economy. When (not if) we eventually reach this situation, you will no longer need to count the price of Bitcoin against the US dollar because the latest won’t even be relevant anymore. Instead, we will enter into a new era – that of the Bitcoin standard.
The main problem with modern society is the lack of education in important matters. Among them, there is no formal education when it comes to understanding the financial system we are all part of. There is no explanation as to why or how our money can be best used, which leads to most “smart” people simply storing it in the bank.
While this may have been a good strategy in the past, there is currently not much that a bank can do for you – Apart from non-existent interest rates, storing money in the bank simply means that they will lose their value over time. This happens due to inflation, a process that has been ongoing for more than 50 years.
The only way individuals can break from this trap is by investing in assets that are not correlated with the US dollar. Precious metals and Bitcoin tend to be the best options in this case, as they tend to be the most liquid. However, you should consider doing more research to discover and utilize other untapped opportunities as well.