How Can Cryptocurrency Hedge Against Inflation?

No matter how much money we earn, doesn’t it feel like it’s slowly dissolving. Almost like when you keep an ice cube under the sun? With time, the price of everything we buy for our everyday use is increasing massively. It’s happening due to inflation.

This issue usually occurs when there’s an imbalance between a product and its demands among us. So, for example, let’s say, there are only five laptops available in the world. And once these are sold, no one else will create or develop them again.

Hence, if these products used to be sold within the price range of $100 before. Now they’ll be sold for $200 or more, because they are limited.  

That’s how inflation works. 

However, the thing is, hyperinflation has been plaguing our economy since ancient times. People have always tried to find a solution for it in every era. In recent times, we’ve been using real estate, government bonds, and gold to hedge against inflation. But now, there’s a new contender in the market – cryptocurrencies. While using them as an inflation hedge is quite controversial, it’s an intriguing prospect in several aspects as well. 

How Can We Use Cryptocurrency As An Inflation Hedge? 

Cryptocurrencies being one of the best inflation-resistant investments, lie in the concepts of decentralization and scarcity. Fiat currencies, like the USD, INR, or Sterling Pound, can be printed endlessly by our government. Which, in turn, would decrease their value over time. However, crypto assets only have a fixed supply. For example, there are only 21 million Bitcoins available in the world, and among those, more than 19 million have already been mined. 

How Bitcoin is Mined (Source: Fool) 

And after 2140, there’ll be no more Bitcoin left, according to EY. Furthermore, some cryptocurrencies, like Ethereum, have mechanisms that burn a part of the transaction fees. In order to reduce supply over time. Due to these in-built scarcity systems, many consider cryptocurrencies as a safe haven asset, similar to gold. 

However, the problem is that no hedge is perfect, and the same goes for cryptocurrencies as well. They are volatile, cause environmental concerns, come with various security risks due to the lack of regulation, and much more. So, how do you choose cryptocurrencies that are both somewhat stable? And can it be used as a digital asset hedge against inflation? 

Finding Inflation-Proof Cryptocurrencies 

When searching in the market, you’ll come across two types of cryptocurrencies – stable and unstable. If you are considering trading, the latter would be a great option for you. As their price keeps on going up and down all the time. So, if you are aware of the trends in the market and keep up with the news. Creating a good strategy to earn money won’t be too difficult. 

However, if you are looking for an inflation-proof option, it’s important to look for something stable, like Bitcoin. However, as BTC is already hitting the price range of $92,000, they are not really an affordable option for everyone anymore. 

So, if you are looking for a replacement for it, Ethereum could be an amazing option, too. It comes with a deflationary feature, which burns a part of its transaction fees to restrict the production and total limit of ETH. Also, unlike BTC, Ethereum is also being used as a platform to create smart contracts and new coins. So, it’s extremely future-proof in that sense.

However, if ETH still seems too unpredictable to you, or maybe you just want to play it safe, choosing stablecoins as an alternative can be a great option, too. These are usually pegged to traditional currencies, like USD, which provides a hedge against crypto’s ups and downs while maintaining value. However, the catch here is that these cryptocurrencies usually depend on the same financial system they promise to escape from. Quite hypocritical, aren’t they? 

Finally, I have found some newer options, such as Solana and Binance Coin, to be perfect for protecting against wealth inflation, too. These two coins are limited, much like Bitcoin, have a strong ecosystem, and offer faster transactions while requiring a small fee.  

On the other hand, privacy-focused currencies, like Monero, provide another layer of financial control due to boasting a higher level of security. 

Challenges Of Using Crypto As An Inflation Hedge 

While market volatility can be quite challenging to maneuver against, it’s not the only issue that’s stopping cryptocurrencies from being a perfect inflation hedge. Market correlation is yet another problem that’s been plaguing the market for a while. 

For example, there was a time when Bitcoin was considered to be an outsider as it behaved differently from traditional currencies. However, lately, the ups and downs of its price follow the same notion as the stock market. If investors start treating cryptocurrencies like any other financial asset, it’ll be impossible to use them to hedge against inflation. 

Also, there’s the ever-present issue related to regulating cryptocurrency and whatnot.  

Basically, there are quite a lot of things our governments don’t like – and losing control over money is one of them. However, the crypto market challenges traditional finances in ways that make regulators and government bodies uneasy.  

That’s why many countries are tightening rules, introducing taxes, and trying to outright ban trading cryptocurrencies to maintain a ‘centralized’ financial system. If governments keep on clamping down hard on this market, this dream of using digital assets as a mainstream inflation hedge will take a serious hit. 

The Bottom Line 

Cryptocurrency does have the potential to act as an inflation hedge in the future. But before it goes that far, we need to accept it as it is – decentralized, not-so-secure, volatile, and independent. No one knows if the market will ever be able to get through the issues it’s faced since the beginning, but let’s hope for the best. Because if there’s anything that can save us from the blackhole of inflation, it’s cryptocurrency.