Posted in:

Is Crypto a Good Protection Against Inflation?

© by https://penntoday.upenn.edu/

Introduction

The devaluation of fiat currencies engendered by the country’s monetary policy committee has often given investors the need to seek out other financial instruments to serve as a protection against inflation. Many investors have often embraced crypto as a hedge against inflation. On the contrary, our experience of the crypto bear season has revealed that crypto does not always satisfy these expectations at all times. This work has therefore considered the functions of crypto currency. We have also discussed in this work those critical moments when crypto has historically been regarded as serving as a  protection against inflation and when it usually disappoints. Readers will find in the end the list of the most popular Cryptocurrency based on their market capitalization. 

What is Crypto

Cryptocurrencies are digital assets with volatile prices. They are built on a Blockchain and used as a store of values. The purpose of crypto is to create a Decentralized financial system that allows everyone to perform their financial transactions without revealing the identity of the individuals. 

What is inflation

Inflation is the loss of value for a given country’s fiat currency caused by a large inflow of money into the capital market. In simple terms, inflation arises when too much money is seen chasing the available products and services resulting in producers raising the prices of their goods and services offered to the consumers. One important point to note about inflation is that it reduces the buying power of that currency and prices rise drastically too. 

Is crypto a good protection for inflation?

Often cryptocurrency has been regarded as a hedge against inflation. Hence, many investors today invest largely into crypto as a way of protecting their capital from devaluation due to inflation.

Nonetheless, our experience of the crypto market operations during the bear market has shown that crypto cannot fully be regarded as a protection against inflation in cases of economic crisis especially when the Fed seeks to fight inflation by hiking the interest rates.

On a lighter note, analysts believe that the only instances where crypto has become a hedge against inflation are when the government pumps more money into the economy through Quantitative Easing. In this case, a large inflow of money into the equity market excites investors to invest more in cryptocurrency leading to higher price targets. This is usually called the Bullish season. 

List of ten most popular cryptocurrencies based on their market capitalization.

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Binance Coin (BNB)
  • Ripple (XRP)
  • Cardano (ADA)
  • Dogecoin (DOGE)
  • Solana (SOL)
  • Polkadot (DOT)
  • Shiba Inu (SHIB)
  • Avalanche (AVAX)

Above all, to invest in any of these Cryptocurrencies listed above, you will need to select your crypto exchange where you will be required to register and fund your account in order to  buy your preferred crypto. 

Advantages of using crypto to protect against inflation 

  • Provides a means for diversifying portfolios. 
  • Offers a passive source of income when prices appreciate
  • Provides a means for earning in stronger currencies.
  • Offers exposure to the financial market.

Disadvantages of using crypto to hedge against inflation 

  • Some coins have no maximum supply which makes them subject to future inflation too.
  • There is no guarantee for profits. 
  • Prices of various Cryptocurrencies could be affected by government policies
  • The crypto market could disappoint investors during the bear season.
  • Using crypto to hedge against inflation bears risk to the investor’s capital. 

Functions of Cryptocurrencies today

  • Serves as a medium for exchange
  • Used as a store of values
  • Used in hedging against inflation during quantitative easing
  • Provides a decentralized means for sending and receiving money.