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Is crypto a good hedge against inflation?
Global inflation is rising, with economies struggling to keep up with the increasing prices of goods and services and the diminishing purchasing power of local currencies. As a result, people - both professional investors and individuals looking to save - are looking to find an asset to to invest in that will work as a hedge against declining fiat values.
Gold and stocks have been a hedge for investors looking to save against the risk of inflation. These commodities have worked to a degree, but there are limitations, leading investors to look to alternative assets as a hedge. Gold and silver, while still offering a long-term ROI over the past decades, steadily lost year-on-year in 2021, offering investors little return.
Cryptocurrencies, like Bitcoin, have become a popular way for investors to hedge against the rising inflation without the need for technical skills in financial management - a skill set needed for stock investment. Despite the volatility, cryptocurrencies have offered investors massive returns over the past years. Since it was launched, Bitcoin boasts a 31411.2% return on investment.
What is inflation?
Inflation happens when the purchasing power of a fiat currency diminishes, leaving investors with less value over time. It means more units of the currency (such as the United States dollar) are needed to purchase the same items as before. Inflation occurs when things become more expensive, but earning remains the same. As a result, people need more money to buy the same goods or services, but their salaries tend to remain the same or similar.
Can investors use Bitcoin as a hedge against inflation?
Unlike fiat currencies, which can be printed, Bitcoin is a limited resource and has a finite supply that will be able to be produced. Bitcoin is created by means of “mining”, increasing the supply of the token into the ecosystem. However, only 21 million Bitcoin will ever be available to be mined, and once created, no one will be able to create more. This brings in scarcity, which offers resilience against deflationary value - making it a good asset to hedge against fiat.
The economic concept behind inflation is that the more money is printed, the more it is in supply and the less value each bill holds. Bitcoin, with its limited supply, does not suffer from this risk because it cannot be created in excess and the demand-supply relationship will remain stable, despite the market movements.
Bitcoin volatility
When Bitcoin is in a bear market - such as the current state of the market as of June 2022 - there is more volatility and the short-term value of the cryptocurrency industry is shaky. However, as a long-term asset, Bitcoin has historically rallied each time following a bear run to tag new all-time high values. This makes Bitcoin a good long-term hedge against fiat inflation - if investors choose to hold and retain their cryptocurrencies despite a downshift in the market.
As a result, Bitcoin as an asset, is a good hedge against fiat currencies. Long-term statistics reveal that cryptocurrencies are a better overall store of value compared to stock, real estate and commodities like gold and silver. The fundamental core characteristics like Bitcoin’s limited supply and decentralized nature set Bitcoin apart as an asset to hedge against rising inflation.
For investors who would like to invest in the cryptocurrency market but have little to zero experience in crypto, an automated trading tool is your best bet.These trading tools like Bitcode Prime, have built in features which do all the heavy lifting when it comes to trading. It relies on sophisticated algorithms to scan the cryptocurrency market in search of profitable opportunities, so you literally do not have to wait or go through strenuous trading to start using Bitcoin as a hedge against inflation. All you need to do is find a trading tool that works for you.
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