It is no secret that the last four years have seen intense rises in inflation. Many fiat assets around the world have been slipping in value at an uncomfortable rate. Understandably, this has led people to try seeking alternative financial options, such as crypto, as a safe haven, or even a cure for such hardship. But is it a smart idea to hold these assets as a means of offsetting inflation? And if so, then how exactly should it be conducted?
What is Inflation?
Inflation is the process of a currency losing its value over time, which therefore means that the price of goods and services rises in relation to it. Essentially, if the fiat currency you use is experiencing (drastic) inflation, then you will have to spend more to buy the same goods that you used to in the past. This is referred to as buying power.
If you are not economically educated, then this likely sounds inherently bad. However, in reality, having some level of inflation is healthy for a country. This is because a slight decrease in purchasing power encourages spending and stimulates the market. That being said, the current issue that the world is facing is that inflation is happening rapidly, which is eroding people’s paychecks, and making general life harder. Since the start of the COVID-19 pandemic, many fiat currencies have been struggling to stabilize their inflation rates.
Why Hedge Against Inflation?
The best reason to hedge against inflation (meaning to invest or store your money in a way that protects your buying power), is that we are currently unsure just how long this period of rapid price increases will last. While governments, economists, and politicians have claimed for some time that these high rates are transient, the reality is that they cannot promise this as it is tremendously hard to predict the financial world in any way whatsoever. The sheer uncertainty has led people to take matters into their own hands, and make financial moves to help soften the blow of potentially further inflation increases.
What Makes an Asset a Good Hedge Against Inflation?
If you want to hedge against inflation, then you need to choose an asset or investment that acts atypically to most fiat currencies. More specifically, you need an asset that tends to be more stable, or which has been known to rise in value over time. Fiat currencies are all known to slowly trend downwards due to inflation, and so you want to hold something that has a different history and trajectory.
Some of the top options for hedging against inflation include precious metals (like gold, silver, and palladium), historical artifacts, housing, and cryptocurrency. However, each of these have their own drawbacks and complications, as this process is as much an art as it is a science.
Related Content: The Three Best Cryptocurrencies to Buy for Long Term
Is Crypto a Good Hedge Against Inflation?
Crypto can be a good hedge against inflation, but there are some huge caveats. For starters, it will depend on which cryptocurrencies you use to store your wealth, as no two coins or tokens are the same. Not only this, but you need to consider the fact that the crypto market is highly volatile– while top-performing assets like Bitcoin and Ethereum have historically risen upwards when you zoom out on their charts, they are tremendously temperamental on a day-by-day basis.
To illustrate this, let’s look at Bitcoin’s growth over its lifetime, and then compare that to a snapshot of its price chart from a smaller period. In 2016, BTC was worth $400, but in the space of eight years, it climbed to $42,000. From this perspective, Bitcoin looks like an amazing asset to store your wealth in, as it will not only protect against inflation, but it will earn you fantastic returns.
However, this can be a misleading narrative. While it is true that Bitcoin can lead to fantastic price rises and returns, it is a little more nuanced than that. Let’s consider somebody investing in BTC in April 2021. At this point, its price was at $54,000. If somebody held their wealth in Bitcoin due to looming fears about fiat inflation, then if they looked at their money right now in 2024, then they would have lost money, as it is worth $42,000.
That is a 22% loss. For context, the cumulative rate of inflation in the US from 2021 to 2024 was approximately 12.4% (according to the US Inflation Calculator). There is no doubt that this is a high rate for such a short time, but it is also obviously better than the losses somebody would have incurred by attempting to hedge with Bitcoin.
It is easy to say that cryptocurrency is a good hedge if you look at an asset’s price over a very prolonged period, but the reality is that many people who feel they need to hedge for the sake of their wellbeing, families, and overall living standards must consider the fact that sometimes you cannot wait for 5-10+ years to access your money. If you try to hedge against inflation with something like crypto, you may find that economic hardship means you need your funds sooner rather than later– and the volatility of Bitcoin, Ethereum and other altcoins could lead to losses.
Hedging With a Savings Account
With all of that being said, there are definitely still ways to hedge against inflation with crypto. One method that has gained a lot of prominence is by using a crypto savings account or growth account. To do this, you could simply take your fiat, convert it to a cryptocurrency, such as Bitcoin, Ethereum, or even a stablecoin like USDT or USDC, and then enter it into a savings or growth account. A good choice for this is Ledn’s Growth Accounts, where you can currently earn up to 10% APY.
The reason a savings/Growth account is great for hedging is because you are not only holding your wealth in the hopes that the asset will rise, but you are also making returns in the form of interest. In a sense, you could even say that the interest you gain acts as a hedge against the volatility of assets like BTC and ETH, therefore making your overall hedge strategy more solid.
Stablecoins vs Bitcoin as an Inflation Hedge
When people ask whether crypto is a good hedge against inflation, they typically think of Bitcoin or Ethereum. However, it is also possible to use stablecoins in this way. That being said, there are some important factors to keep in mind if you pursue this route.
For starters, while stablecoins might sound like a great choice due to their name, it is worth noting that the stability that these assets offer is very different from the stability that people look for when hedging against inflation. A stablecoin is stable because it is designed to have a price that matches another asset; typically legal tender such as USD or CAD.
Therefore, if one of these assets experiences high inflation, then its corresponding stablecoin will, too. For example, if the US dollar has a diminished buying power, USDT and USDC will follow suit. Their stability is relative to their underlying assets– they are not stable against the economy as a whole.
That being said, the previously mentioned method of using a savings/Growth account can still apply to stablecoins. The interest you earn from these accounts could be enough to combat inflation. In fact, stablecoins tend to have the highest interest rates in the crypto savings market, which definitely makes this viable.
To give an example, at Ledn, USDT and USDC interest rates currently are between 8.5% APY and 10% APY. So long as this interest rate outperforms the rate of inflation, you will essentially increase your personal buying power. And even if it does not successfully do this, you will still reduce your losses in buying power. The 2023 rate of US dollar inflation was 3.4%, meaning that if you held USDT or USDC in a Ledn Growth Account for that year, then it would have acted as a decent hedge.
One benefit of doing this over using BTC or ETH as a hedge is that you do not need to worry about volatility in the short term. You could essentially view it that Bitcoin and Ethereum are good contenders for a hedge against inflation if you plan to store your funds in a savings account for many, many years (such as 5+ years), and that stablecoins would make a decent hedge for shorter-term periods (1+ year).
Of course, as said before, this is not an exact science, and so there cannot be guarantees when it comes to hedging. This perspective is built upon historical observations, but the economic world (and especially the crypto sector) is temperamental and notoriously hard to predict. So, just because one method worked in the past does not ensure success in the future.
How To Use Crypto As A Hedge Against Inflation
Let’s focus on a few ideas that you should keep in mind when it comes to using crypto as a hedge against inflation.
Consider the right crypto for you:
You should think carefully about what cryptocurrencies you want to use as a hedge. As mentioned earlier, stablecoins and standard cryptocurrencies work very differently in this regard. While regular cryptoassets may have a greater long-term performance as they are not bound by the same inflation metrics as fiat, they are highly volatile in shorter periods. Stablecoins, on the other hand, are not volatile, but they experience the same rates of inflation as their underlying fiat.
If you decide that longer-term hedging is suitable for you, then you still need to think about which cryptocurrencies you would like to engage with. Bitcoin and Ethereum are the two big names that often pop up, but they are very different in nature. When making a long-term hedge, you are essentially investing. Therefore, you need to treat it as such by performing as much research on the assets as possible.
You need to think carefully about whether you believe the asset will appreciate in value for however many years you want to perform your hedge. The more years you plan for, the more confident you must be that the asset will be valuable in the future. If that sounds too stressful, then you can still hedge long-term with stablecoins, although all your gains will come in the form of interest, not from any asset appreciation.
Use a Savings Account:
If you plan to hedge with a cryptoasset, then you should at least consider whether a savings or growth account is right for you. While you can hold BTC, ETH, and many other coins and tokens without an account and still successfully hedge, you up your chances by using a savings account as they build interest.
If you are planning to hedge with a stablecoin, then you will likely need to hedge with a savings or growth account, as they experience the same inflation as their fiat counterparts. Therefore, your only method of combating this is via earning interest. Ledn is definitely worth taking a look at, as they offer savings accounts (referred to as Growth Accounts) for BTC, ETH, USDT, and USDC.
Look Into Trading
It is possible to hedge against inflation by trading cryptocurrencies. This is by far the most volatile and advanced method of doing so, but if you are a well-versed trader and you understand the nature of both the crypto and fiat markets, then you can technically make consistent moves that keep you ahead of the rate of inflation. However, it cannot be expressed just how hard this is, and how quickly you can lose money. Trading should never be considered a safe route, and while all methods suggested have an element of risk involved, they are overshadowed by the dangers associated with trading.
The Risks Of Using Crypto To Hedge Against Inflation
Let’s briefly list out some of the top risks that come with hedging, which you should be aware of. These are just a handful of concepts you should keep in mind before attempting this activity.
- Cryptocurrencies could depreciate in value whilst hedging.
- Stablecoins could become defunct due to the companies running them.
- Stablecoins could depeg and slip in value.
- You may need to access your funds before your period of hedging is over, and if you have locked them for a set time then this can cause complications.
When it comes to any of these matters, the best way to mitigate such risk is to use a crypto savings account, as they earn you interest overall. In essence, this will not offer complete protection, but it can act as a fantastic buffer against unpredictable issues related to rates and volatility.
Benefits of Investing in Cryptocurrency as a Hedge Against Inflation
Let’s now list out some of the benefits of hedging with crypto:
- Crypto is accessible worldwide, with a low barrier to entry.
- Stablecoins, coupled with a savings account, can beat the rate of inflation (provided the interest rates are competitive).
- You can hedge against inflation by diversifying and holding multiple crypto assets.
This should help you make up your mind about whether hedging with crypto is right for you, and just how useful this method can be during times of intense inflationary action.
The Best Way To Use Crypto as a Hedge Against Inflation
While there are many ways of using crypto as a hedge against inflation, one of the top methods of engaging with this is by using your assets to earn interest in the process. There are several options for achieving this, however, a favored route is by using Ledn’s Growth Accounts. Here, you can save BTC, ETH, USDC, and USDT, earning up to 10% APY. This is a decent rate that can outperform inflation in many circumstances, which is perfect for many hedging strategies. Alongside this, using cryptocurrencies with high liquidity and strong market capitalization like BTC, ETH, USDC, and USDT also protects against the volatility risk outlined above.
Conclusion
In an age where inflation is creeping up faster than in previous decades, it makes sense to consider hedging as a means of fighting against diminishing buying power. The crypto market offers a potentially powerful buffer in this regard. People can either hold crypto assets on their own, or they can boost their chances of success by opening a Ledn Growth Account and earning interest, which helps to further mitigate inflationary behaviors. To check this out for yourself, learn more about Ledn’s accounts here.
The above is general commentary, you should seek advice from a professional regarding your specific financial situation.
Sponsored by 21 Technologies Inc. and its affiliates (“Ledn”). All reviews and opinions expressed are based on my personal views.
