Why Crypto Might Be a Good Hedge Against Inflation for Assets
Hyper-inflation has made the cost of living increase 7.5 percent in the last year. Can crypto help you hedge your assets against inflation?
On Feb. 10, the U.S. Bureau of Labor Statistics released the latest Consumer Price Index, which shed light on just how much inflation has impacted the nation in the last year. In the 12 months ending in January, inflation rose 7.5 percent, which is the highest amount in the last 40 years. Some investors are betting on crypto to help them hedge their assets against inflation. Is crypto a good hedge against inflation?
If you aren't investing your money, it’s losing value as we speak. However, if you put your money in an asset that will likely grow, you can beat inflation at its own game. Is cryptocurrency the answer?
Legacy crypto like Bitcoin and Ethereum could potentially be an inflation hedge.
In the past, investors have used assets like gold to hedge against inflation. Gold has a variable price in the U.S. dollar, and the cost per ounce of gold goes up as the dollar falls.
However, investors interested in participating in the Web 3.0 era are looking at cryptocurrency as a suitable hedge against inflation.
The two top contenders are Bitcoin (BTC) and Ether (ETH). Both of the coins operate on their native blockchains. They’re volatile in nature, but provide greater potential for returns than any altcoin on the market.
BTC is trading at $43,644 as of Feb. 11. The coin’s value is down 9.07 percent in the last year. The coin clearly hasn’t been an inflation hedge during this time, but investors are looking from a longer-term perspective. BTC is up 390 percent since February 2020.
Meanwhile, ETH is trading at $3,100 as of Feb. 11. The coin’s value is up 67.42 percent in the last year. Ether has helped investors hedge against inflation during this time, although it isn't immune to volatility. ETH is down more than 15 percent YTD.
Are crypto altcoins a safe inflation hedge?
There are more than 10,000 altcoins minting and trading on the world’s blockchains. Many of them aren't going to be suitable investments for someone looking to hedge against inflation. Some are duds, some are scams, and some don’t have the utility to make a difference.
Popular altcoins include Cardano (ADA), Algorand (ALGO), and even Decentraland (MANA) for a true Web 3.0 play.
Technically, Bitcoin is the only original cryptocurrency and all of the others are altcoins. However, ETH is a strong-standing competitor and can be considered on similar footing. Also, the Ethereum blockchain has the added benefit of being less energy-intensive than the Bitcoin blockchain.
Ethereum is transitioning to a PoS (Proof-of-Stake) consensus mechanism, which uses up to 99.95 percent less energy than the traditional PoW (Proof-of-Work) model. Bitcoin uses a PoW protocol and accounts for a significant portion of energy use throughout the world. BTC proponents say that mining Bitcoin uses stranded energy or energy that would have otherwise been wasted in the energy-generating process.
Consider investing a portion of your portfolio in crypto for a limited inflation hedge.
To limit your risk exposure, invest a portion of your portfolio in cryptocurrency. Start with a small amount, like 5 percent, and determine if you’d like to invest a greater portion over time.
Inflation is happening as we speak, but you don’t have to lose wealth in the process. However, you also don’t have to liquidate your life savings and invest it all in Bitcoin like the Taihutti family, who moved to Portugal to avoid capital gains taxes on cryptocurrency.