The markets, and indeed, global finance itself have wandered into uncharted waters. By all accounts, here in the U.S., we are facing the worst inflation since the 1980s. Prior to this, the inflation of the 70s and 80s was remembered with a sort of “Let’s not ever do this again”.
Here we are. And there are many analysts predicting this stretch to be worse.
The search for safe-haven assets
Safe havens are few and far between. Reliable ways of making after-inflation returns on investment are virtually extinct. Traditional conservative investments like the humble savings account or CD guarantee lost purchasing power. Government and corporate bonds have become an afterthought for many investors thanks to over a decade of near-zero interest rates. The inherently risky and shaky stock market has been mutated by massive quantitative easing into a truly spectacular bubble over the last few years.
Institutional investors lump investments into two categories: Risk-on and risk-off. Risk-on assets are the high-flyers, IPOs and fast-growing tech companies, emerging markets stocks, the high-risk-high-rewards sort of assets.
Risk-off assets are focused on the “return of my investment, not the return on my investment” investor. Government bonds, CDs, savings accounts, money-market accounts and savings bonds.
In this environment, we’re struggling with this binary definition. Today’s risk-on assets don’t look appealing, and even risk-off assets are guaranteed losers when inflation is factored in.
The biggest risk
Talk risk-on and risk-off investment all you like, the biggest risk in any inflationary environment is wealth erosion. That’s loss of purchasing power, or watching your monthly bills rise while trying to pay them with the same amount of income.
Unlike “regular” times, preventing capital erosion has become the priority for many investors. Fortunately, this time really is different. Today, we have tools that didn’t exist during the stagflation crisis.
This is one of the reasons why we’ve heard bitcoin investments, as well as other cryptocurrencies, touted as inflation hedges. Bitcoin especially due to its permanent mintage cap. Unlike dollars, there’s just no way to magically create more bitcoin just because you want to.
Nobody’s going to argue that the crypto market isn’t a volatile one, which has its good and bad sides. But when you’ve stripped all the volatility and the double-digit percentage swings, you are nonetheless left with attractive and solid assets. bitcoin, again, is the first to come to mind. For the crypto bull, that volatility is an absolute benefit! Big price swings can shake out the “weak hands” and offer steep discounts on a favorite cryptocurrency.
For all the altcoins that have captured investors’ attention, and there are indeed many, bitcoin still isn’t budging from its #1 spot. One could say “despite its lofty price”, but that many investors are still dead set on bitcoin when a single token is already going for $40,000 to $60,000 is a value clue.
Bitcoin as an inflation hedge seems to be a real consideration for every crypto investor. But what about tokens that aren’t decentralized, are rapidly changing and come without a supply cap? It might seem odd at first, but these, too, are popular among the inflation-wary investors.
Ethereum vs bitcoin as an inflation hedge
A recent study looked into how ether might overtake bitcoin as an inflation investment. The researchers singled out Ethereum’s newly-implemented deflationary burning feature as one of the most important reasons. Outside the study, though, we find the move to a proof-of-stake mechanism to be even more noteworthy.
Large and small, individual and institutional, investors are increasingly seeing ETH as a long-term play. Ethereum’s claim to fame is its utility, its role as the backbone of the ERC-20 ecosystem. Everything from NFTs to smart contracts, and the vast majority of cryptocurrencies, owe their genesis to Ethereum. Obviously the ether coin benefits from this widespread adoption and use.
The top two cryptocurrencies are just two examples of crypto assets with long-term value and lots of upsides. A quick look through the market will reveal many more. And this is where we begin to understand why crypto makes for a good inflation hedge. Its volatility is, for the most part, familiar: 20% or less slides, then bouncebacks, with steady increases in market cap. In other words, as many have noticed by now, every single one of crypto’s precarious drops have resulted in prices soaring far higher. Every single one.
On the other hand, we have fiat currencies, namely the U.S. dollar. Last year’s 7% annual inflation rate shows us that the dollar’s “safe store of value” reputation isn’t earned. The trouble is, in the short-term, drops in dollar value are for keeps. Purchasing power doesn’t recover – it simply wallows in its newfound bottom, or continues its slide.
Fiat currencies are managed “for your own good” by teams of unelected technocrats whose arbitrary decisions can leave citizens destitute. Or desperate to buy bitcoin, like the Turkish victims of inflation (45% purchasing power lost in a year, as much as 20% gone in a single day).
A Turkish citizen named Tal explained how he’s dealing with the situation:
People need to understand how bad the economy is here. I believe bitcoin is the solution. In Turkey, we now have over 5 million people investing in bitcoin and cryptocurrencies. I try to save as much money as I can to bitcoin, because bitcoin is the best solution.
Let’s hope the U.S. economy doesn’t have to learn the same destructive lesson.