Inflation in simple terms refers to a scenario in a country’s economy, in which the prices of goods and services increase and the purchasing power of its currency decreases. Often cryptocurrencies like Bitcoin have been called inflation hedges, but what does it mean.
Inflation can occur for several reasons including:
- Surges in demand for products and services.
- Increases in the price of raw materials required to provide goods and services.
- Intentional hikes in the prices of goods and services by corporations.
Inflation is what happened when you watch old TV commercials and see some products that sold for under a dollar in the 90s, and then walk into the store a day after, only to see the same product on sale for ten dollars.
Inflation is why houses and real estate can be worth several times their dollar amount within a space of a few years.
What Is The Correlation (Or Lack Of Correlation) Between Crypto And Inflation?
Inflation at the bottom is inevitable.
It is bound to occur sooner or later. Inflation sometimes occurs multiple times sooner than later and can be a devastating experience for the unprepared.
Historically, people protected themselves against inflation by converting some of their assets into others that retained their value for longer, in a method known as ‘hedging’. Some of these assets include gold and real estate.
However, since the creation of bitcoin and other cryptocurrencies, people have chosen cryptocurrencies (sometimes called digital gold) as an alternative to actual gold. This is because cryptocurrencies in general, are decentralized, and their value is largely independent of the value of any other commodity.
What Is Hedging?
Hedging is one of the financial intelligence strategies that everyone should be aware of.
Hedging is a risk management method that involves protecting one’s self against a setback in finances, by investing in multiple assets at a time. These assets can include futures, derivatives, and real estate.
Hedging against inflation with cryptocurrencies by extension is a means by which individuals diversify their assets by including cryptocurrencies.
They do this so that in the event of setbacks in one financial sector, they are only partially affected. As opposed to an individual with all their eggs in one basket.
Hedging with or without crypto by no means protects against negative finances. But an individual with properly hedged assets should be just fine when inflation occurs.
Cryptocurrencies vs Inflation
Cryptocurrencies can be a great way to protect oneself against inflation, but it is important to mention that the cryptocurrency market in itself, is a highly volatile one.
This means that the prices of a coin can fluctuate very quickly, either making you a lot of profit in case of market uptrends or presenting a new form of risk in case of market downtrends. To counter this, it might be advisable to use stablecoins.
Stablecoins in essence, are cryptocurrencies with their value pegged or ‘tethered’ to another commodity with otherwise stable value like a country’s currency, or others such as gold.
When hedging with stablecoins, it is possible to miss out on significant profit when the value of cryptocurrencies is generally appreciated. At the same time, stablecoins save you from huge losses when the value of cryptocurrencies in the market falls.
Is Inflation A Good Or Bad Thing?
Inflation in some cases isn’t such a bad thing. Inflation for individuals with properly hedged assets can even be a great way to make money.
Inflation on a small scale can help drive an economy’s growth, improving everyone’s finances in the process, according to some economists.
Large-scale inflation, however, can have devastating effects on everyone in general, regardless of how properly hedged their finances are.