How To Preserve Capital During Inflation Using Cryptocurrency
Geopolitical tensions and supply-chain pressures have again shaken global financial markets. The world economy was beginning to recover from the unprecedented COVID-19 pandemic that gave the world a considerable blow.
Additionally, inflation has reared its ugly head once more, causing central banks in significant economies to hike interest rates to rein in the skyrocketing costs of necessities like food and fuel. This increase in interest rates has been marked across almost every country in the world. Most recently, the Central Bank of Nigeria increased the interest rate Nigeria to 15.5%.
Similarly, developed nations like the United States and the United Kingdom continue to report inflation at multi-year highs despite these initiatives, placing additional strain on household savings and depressing consumer spending.
These inflationary pressures have a detrimental effect on the value of fiat currency in consumers’ hands and indicate the danger of an impending recession. For instance, the British pound (GBP) has been undervalued to its 40-year low in recent times.
Inflation negatively influences simple returns produced by financial instruments in addition to having an adverse effect on the purchasing power of a nation’s fiat currency, mainly if the inflation rate is higher than the rate of return on investment.
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What Is Inflation To Cryptocurrency?
Cryptocurrencies like Bitcoin (BTC) have produced outstanding profits for early-stage crypto investors compared to fiat currencies. While the USD index has increased by about 8% since August 2019, according to current pricing, BTC has returned almost 240%.
Bitcoin has been corrected by almost 60% since its peak in November 2021, demonstrating its potential for long-term wealth accumulation. One may even argue that Bitcoin can shield users from the harmful impacts of inflation.
Other popular cryptocurrencies, including Ethereum (ETH) and Ripple (XRP), show a similar pattern, suggesting that they could be effective investments during times of high inflation and have the potential to produce retirement savings that outperform inflation.
It is crucial to remember that cryptocurrencies exhibit far more volatility when compared to fiat currencies and are more of assets rather than physical currencies. The limited token supply of cryptocurrencies like Bitcoin is another benefit.
The maximum supply of Bitcoin is designed to be 21 million BTC, with a decentralised feature that makes it different from the arbitrary printing of fiat currency like the dollar.
It suggests that the quantity of BTC in circulation will never exceed the limited supply and which is essential for its potential long-term price rise. Even with no prescribed maximum supply limit for cryptocurrencies like Ethereum, creating new tokens is based on code and computing labour.
No entity can produce ETH tokens without first adding a new block to the Ethereum blockchain, and the block reward mechanism is based on several variables, including the difficulty of the calculations that miners must perform.
Cryptocurrencies operate in a much more open and democratic manner when compared to the arbitrary way in which the U.S. Federal Reserve or any other Central bank in the world prints money.
Are Stablecoins A Hedge Against Inflation?
A rising number of crypto tokens are being introduced in the larger cryptocurrency market to provide a more advantageous substitute for fiat money.
Cryptocurrencies like stablecoins are backed by conventional assets like the US dollar and gold. Their prices are maintained by holding reserves with a value equal to the number of tokens available.
Stablecoins have the potential to provide crypto investors with a means of exchange that can be accessed across International borders without restrictions. Algorithmic stablecoins are part of the blockchain protocol, just as we have stablecoins tied to another cryptocurrency.
Stablecoins may be more appropriate than fiat currencies or commodities like gold because:
1. Stablecoins help performs business transactions with lower transaction costs and faster processing speeds than traditional banking.
2. Since their prices are in parity with the underlying asset, stablecoins are devoid of ill effects of inflation as their values are in proportionality to inflation.
3. Stablecoins are digital assets, hence can be bought or sold via a mobile or computing device, which is accessible to everyone with an internet connection.
It is important for citizens of nations whose hyperinflation has made their fiat currencies a dangerous form of money, such as Turkey, Argentina, Ethiopia, Zimbabwe, and Lebanon. Hyperinflation refers to a situation where there is a rapid and uncontrollable price increase of significant products and services in an economy. The term describes a monthly inflation rate above 50%.
People in these nations could move to stablecoins like Tether (USDT) or Binance USD Coin (BUSD) to preserve their capital from sharp wealth erosion as hyperinflation devalues their national currencies.
They could use cryptocurrencies to protect their investments from inflation by holding them as stablecoins. They could also profit from the appreciation of the underlying peg to make their savings even more valuable.
Hyperinflation does not impact cryptocurrencies like stablecoins because this is resistant even in a high inflation and interest rate regime. Therefore, cryptocurrency may also be the best investment for investors in countries with high inflation rates.
Is It Safe To Invest In Cryptocurrency During Inflation?
While some cryptocurrencies have failed miserably due to fraud, security issues, or a mix of the two, many others have withstood the test of time and continue to draw throngs of investors.
Avalanche (AVAX) and Polygon (MATIC), among other cryptocurrencies, could provide a long-term hedge against inflation in addition to BTC and ETH. Investors might dedicate some funds to these cryptocurrencies to make money in the long run. They could use tools like staking pools to generate additional income from their investments.
According to historical data, it can also be a successful strategy to carefully invest in cryptocurrencies now while trading close to significant support levels and keep them as an inflation hedge.
In contrast to currencies like the Nigerian naira (NGN) and Ghanaian cedi (GHC), stablecoins are more resistant to inflation, mainly when anchored to the US dollar. Nevertheless, certain stablecoins have a reputation for trading below their peak, so investors would be wise to exercise caution when trading or investing in them.
Stablecoins and other cryptocurrencies can be stored in hardware or digital wallets like fiat money in a conventional bank, assisting investors in preventing their wealth from being lost in a hyperinflationary scenario.