An inflation hedge is an asset that protects your investment from a decline in the purchasing power of money resulting from inflation. The asset must increase in value during the inflationary period.
Hedging against inflation protects the value of your investment while keeping operating costs low. Keep reading to understand whether crypto can serve as an inflation hedge.
What Is Inflation?
Inflation is a rate at which prices of goods and services rise, leading to a decline in purchasing power over time. The rise in prices is expressed as a percentage which means that a currency unit effectively purchases less than before the inflation.
This loss in purchasing power negatively affects the cost of living and leads to eventual deceleration in economic growth. Sustained inflation happens when the money supply outpaces economic growth in an economy.
According to experts, a steady low inflation of about 2% annually is healthy. However, the economy and consumers suffer when it increases rapidly to about four times. The 2022 inflation resulted mainly from the COVID-19 pandemic and came with impacts including the following:
- Slow production of consumer goods
- Higher prices of goods in slow supply
- A tight labor market leading to higher wages
- More money in circulation for relief packages
Traditional Hedge Instruments
Inflation hedging offsets the anticipated price drop and limits the decrease in purchasing power. It also protects the value of an investment. There are traditional hedge instruments investors can use to keep up with the rise in costs of living, but the choice depends on personal preference.
Commodities such as gold are wonderful options for hedging against inflation. However, research by Campbell Harvey, a professor at Duke University, and Claude Erb, TCW Group’s former commodities and fixed income manager proved gold more suitable to hedge against inflation over a very long period. This is because gold appreciates during rising inflation although other factors can make it grow in value.
Analysts and economists recommend other traditional ways to hedge inflation, including:
- Moving money into a high-yielding saving account
- Investing in the stock market
- Building real estate income
- Exploring alternative investment options
- Building a 60/40 stock/bond portfolio
- Investing in commodities such as precious metals
- Considering real estate investment trusts
Is Crypto a Hedge Now?
Cryptocurrency has no history as a hedge because no period of high inflation has existed during its existence. However, lacking historical data doesn’t mean crypto can’t be an excellent inflation hedge.
There are only a set number of cryptos in circulation, with Bitcoin limited to only 21 million coins. It makes the coin a wonderful alternative to fiat money which can be printed in unprecedented amounts. It’s easy to hedge your portfolio against inflation on platforms such as Immediate Edge using crypto.
Advanced crypto financial tools are available today to extend the functionality of cryptocurrency beyond storing value. Yield farming or staking allows you to use your coins for crypto-related services leading to passive growth in your savings.
Crypto relies on an automated blockchain system which is more reliable than fiat money. A good example is Ether, whose energy-efficient blockchain portrays greater inflation resistance.
Overall, cryptocurrency follows growth stock patterns making it a wonderful hedge against inflation. However, there’s a need for the crypto community to become more responsible and diligent so as to become more efficient at hedging.
Is It a Good Time To Try Trading Crypto?
Crypto assets have the potential to provide jaw-dropping returns despite the presence of some risks. You must do it properly and diversify your portfolio. Crypto, such as Bitcoin, has shown few price correlations in the stock market. Investing in crypto will diversify your portfolio while managing investment risk.
Trading crypto today has low barriers to entry and is straightforward for everyone. The best time to try crypto trading is when you have researched the industry and gained enough knowledge. You also need a good strategy that will work well on the stock exchange. The rule of thumb is to invest only what you can afford to lose.
The Bottom Line
Inflation is characterized by a hike in the prices of goods and services, leading to a reduction in purchasing power. Gold, equities, and real estate are traditional options to hedge against inflation.
However, more people are adopting cryptocurrency as a hedge because its production is infinite, free from government interference, and easy to transfer. Hedging against inflation protects your investment and lowers operating costs.