Cryptocurrency as a hedge against Inflation.

Rising inflation has many people looking for refuge. There appears to be no way to prevent the oncoming inflationary storm. In such scenarios, investors frequently resort to commodities, particularly gold, which has a long history of serving as an inflation hedge. Recently, however, some investors have begun advocating for Bitcoin and similar cryptocurrencies as an alternative inflation hedge.

What's inflation and how does it come to be?

Inflation is when the general level of prices in an economy rises steadily over time. It refers to a loss of buying power for an economic currency. As a result, consumers must spend more of their currency to acquire the same standard of living. It doesn't matter if you're trying to buy food, utilities, housing, or healthcare; your money buys you less than it used to.Because they are not tied to any particular commodity or good, fiat currencies used by most nations are very susceptible to inflation. Now, since governments and central banks are the only entities authorized to print fiat currency, the value of each individual unit of currency gradually declines as more of it enters circulation.There are many different motivations for buying and holding cryptocurrency. Some do it for profit, while others see it as the fastest way to increase their wealth. Nonetheless, there are many who believe it to be a good store of value. However, the vast majority of them would agree that Bitcoin and other cryptocurrencies are a fantastic way to protect one's wealth against inflation.As the epidemic fades and trade routes reopen, we are witnessing a spike in consumer spending and inflation not seen since 2008. This might suggest that inflation is unlikely to decrease anytime soon, which is bad news. Can cryptocurrencies replace gold as an inflation hedge now that inflation fears are on the rise?

Because they are not tied to any particular commodity or good, fiat currencies used by most nations are very susceptible to inflation. Now, since governments and central banks are the only entities authorized to print fiat currency, the value of each individual unit of currency gradually declines as more of it enters circulation.

There are many different motivations for buying and holding cryptocurrency. Some do it for profit, while others see it as the fastest way to increase their wealth. Nonetheless, there are many who believe it to be a good store of value. However, the vast majority of them would agree that Bitcoin and other cryptocurrencies are a fantastic way to protect one's wealth against inflation.

As the epidemic fades and trade routes reopen, we are witnessing a spike in consumer spending and inflation not seen since 2008. This might suggest that inflation is unlikely to decrease anytime soon, which is bad news. Can cryptocurrencies replace gold as an inflation hedge now that inflation fears are on the rise?

Why is Crypto an inflation hedge? (Cryptocurrency Vs. Traditional Hedges)

Although gold has historically been used as a store of value and inflation hedge, there are various drawbacks to investing in this domain. Therefore, investors are looking elsewhere in the market for hedges against inflation. Since Bitcoin has grown so quickly over the past year, investors see it as a way to beat inflation. Many people are entering the cryptocurrency market as a result instead of investing in traditional assets like gold or real estate.

Technology is more sophisticated than in past eras of high inflation, and cryptocurrencies illustrate how this may revolutionize money as we know it. This is the greatest promise of crypto that gold and other precious metals can never end up making: revolutionizing the financial system. The possible risks are evident. The key to success is research. On the contrary, investing in cryptocurrency has never been more rewarding than it is right now.

Gold may have an edge in terms of price stability because it is not nearly as volatile in price as bitcoin. However, gold is not exactly the paragon of price stability either. Looking back at the last decade, we see that gold's price started at over $58,000 per kg in 2012, fell during the middle of the 2010s, and then rose again by 2021.

Bitcoin, on the other hand, is prone to extreme price volatility. While this may not make bitcoin the ideal inflation hedge, it does make profiting from bitcoin investments simpler in the short term. But when it comes to gains, the leading cryptocurrency has far surpassed gold.

Bitcoin's scarcity and limited correlation to other assets are some traits that it shares in common with precious metals like gold. Like the world's gold supply, Bitcoin is finite; there will only ever be 21 million Bitcoin in circulation. Because of this limitation on the number of assets that can be created, asset values will rise in tandem with growing demands. In addition, Bitcoin's price fluctuations are driven entirely by speculation, not by inflationary pressures. Bitcoin may be seen as a more serious competitor to gold by investors as cryptocurrency use climbs and becomes more widespread and volatility drops.

The allure of bitcoin for its proponents is that it is decentralized and provides some level of independence from governmental control that gold does not. In addition, international Bitcoin transfers are significantly faster and a lot more simple than gold.

So do Cryptocurrencies offer a better way to Hedge against Inflation?

Perhaps yes! However, there are several concerns. Not all digital assets serve the same function. As previously stated, Bitcoin was supposed to be deflationary (only 21 million bitcoins will ever exist, and the amount of Bitcoins generated per day is halved every four years), but other cryptocurrencies have no fixed limit. For example, Dogecoin is mined at a significantly higher rate.

Ethereum, on the other hand, stands apart from those mentioned above. It is more than just digital money. The Ethereum network serves as a computing environment for smart contracts and decentralized applications (dApps). In terms of market capitalization, it's the leader among alternative cryptocurrencies. However, it is critical to note that this element does not qualify it as an inflationary hedge.

As a result, Ethereum's advantage over Bitcoin as an inflation hedge may have less to do with the cryptocurrency's supply and more to do with its utility for other applications.

Therefore, it can be said that Bitcoin is the most comparable asset to gold or other traditional means for hedging purposes, or perhaps even the best crypto to hedge against inflation. Not that you should completely ignore Ethereum, Litecoin, Dash, or any other cryptocurrency; rather, you should be mindful of what you are looking for in an investment. The cryptocurrency market is as diversified as the stock market.

Closing Note

Although it is still too early to say whether or not cryptocurrencies such as Bitcoin will emerge as the ultimate inflation hedge, many industry proponents are optimistic that it will. Financial institutions are increasingly using Bitcoin as a hedge against inflation. While Bitcoin has mirrored the broad slump in tech stocks in 2022, its unique properties as a store of wealth with a restricted and known supply might let it shine as traditional assets fail.

Disclaimer: Cryptocurrencies are highly volatile and subject to market, technical, and regulatory risks. Crypto trading requires one’s own diligence, and Cryptoforce will not be responsible for any losses incurred. Any information provided here should not be regarded as Cryptoforce’s technical or financial advice.