Inflation is when your buying power for goods and services decreases. And many have looked at Crypto as a avenue to protect their wealth and beat inflation, but is crypto a safe haven for inflation?
TL;DR
- Inflation is a situation where your money reduces in purchasing power, to put it into perspective, in October 2022, the value of US$1 = ฿37.5 when just 5 months before in May 2022, US$1 = ฿34.0 which means the buying power of Thai baht has decreased by almost 10%.
- Traders and investors use "Hedging" as a method to fight against inflation protecting their wealth and assets.
- You can hedge your funds against inflation using cryptocurrencies by investing in gold-backed cryptocurrencies, buying stablecoins, investing in robust blockchain technologies, and earning free crypto from NFTs and Web 3 DApps.
How Do Cryptocurrencies Protect You Against Inflation?
You have probably heard of the term inflation many times and more so during times of recession. Inflation can be caused by many different things which include global events, central banks printing more currencies, or a black swan event that cripples the economy.
What is Inflation?
So the big question here is, what is inflation and how does it affect us? To put this into perspective, the value of ฿1 is currently worth 3.29 cents. This means that one Thai baht has lost purchasing power against the US Dollar and can buy fewer goods or services.
Or in simple words, inflation is the reduction of purchasing power of a currency. And it's one of the reasons why investors are flocking to preserve their wealth in different assets, such as gold, property, and cryptocurrency.
What is a hedge?
Even though some investments may seem to give a high return, their value may go down when inflation is taken into account. For example, a stock that gives a 5% yield, but with an inflation rate of 6%, the asset is depreciating 1% per year.
To protect your assets from inflation, you might hear the term "hedging" being thrown around. Hedging is a risk management strategy used to reduce risk or offset any adverse price movements in the market, which can ideally help protect your capital against this reduction in value.
For example, gold is often seen as a hedge against inflation due to its increasing value against the U.S. dollar. Generally speaking, the price of gold will rise if the dollar declines due to inflation. As inflation rises, the price of an ounce of gold in dollars goes up.
This protects people who own gold as compared to someone holding the US Dollar that is losing value. Therefore, the investor receives a higher dollar value per ounce of gold to account for inflation.
Crypto as a Hedge Against Inflation
Given the volatility of cryptocurrencies, it’s clear that crypto cannot directly protect your money against inflation. However, there are still some effective ways to hedge your funds against inflation using cryptocurrencies:
Gold-Backed Cryptocurrencies
Gold-backed cryptocurrencies are pegged to the dollar value of gold. With the principle behind stablecoins, each piece has a corresponding physical gold in storage. Unlike other cryptocurrencies, whose value is based on supply and demand and is subject to speculation, a gold-backed token is tied to a specific tangible asset. This protects it from extreme volatility and inflation.
Some of the most popular gold-backed cryptocurrencies are Paxos Gold (PAXG), Perth Mint Gold Token ($PMGT), DigixGlobal ($DGX), Gold Coin ($GLC), and Tether Gold ($XAUT)
Dollar-Pegged Stablecoins
Investing in stablecoins and staking them is another way to preserve funds. Stablecoins, like USD Coin ($USDC), Tether ($USDT), and Dai ($DAI), are pegged to the dollar value. Therefore, they are not affected by the extent of inflation in the country or the ever-changing crypto prices.
Investing on Technologies
Investing in crypto isn’t about just investing in price action, but understanding the underlying technology behind cryptocurrencies is one of the most common practices in crypto investing. Not surprisingly, innovative blockchain technologies can also protect your capital against inflation.
