No matter your financial status, you probably have concerns about the state of the economy in 2022. High inflation risk factors like heightened interest rates, a rising consumer price index, and the looming threat of currency devaluation have increased the financial strain on all economic classes for some time now.
Like others, you may have heard about bitcoin inflation hedge hopes. Whether you’re a seasoned manager of your personal finances or just starting with a long-term plan, you probably have questions about what exactly hedging is and how you can accomplish that goal with non-cash assets such as bitcoin (BTC) and other cryptocurrencies.
In this blog, we define inflation, explain what it means to hedge against inflation, and discuss the ways in which bitcoin and cryptocurrency can help people achieve this goal.
To learn more about cryptocurrencies like bitcoin and what they can do for your portfolio, keep browsing our blog and read our analysis below..
What Is Inflation?
In the realm of economics, inflation generally refers to an overall rise in the cost of goods and services. Inflation can occur within an isolated economy but often has a ripple effect on economies connected on a global scale.
In simple terms, the inflation level directly impacts a given currency’s purchasing power. When inflation rises, the buying capability or value of the dollar goes down.
What Inflation Does to an Economy
Inflation has a habit of grinding economies to a halt. When goods and services cost more, people buy less. In addition, people may feel more inclined to save what money they do have, further slowing the overall buying rate.
When businesses get fewer customers, profits plummet. This sudden drop can be devastating for some industries and small businesses, reducing the company’s market capitalization or value on the stock market.
What Are Inflation Hedges?
When markers for inflation become apparent, entities such as the Federal Reserve begin to take measures to hedge against rising costs.
Chief among the Federal Reserve’s tools to combat economy-wide inflation, interest rate hikes help slow the rate at which central banks issue loans. This action helps lower prices in the housing market and curb the general demand for goods and services.
What It Means To Hedge
To make it clear, hedging refers to steps taken to limit the risks associated with holding financial assets.
Many people hedge their cash or liquid capital, for example, by investing in traditionally less risky assets such as gold.
When the Federal Reserve raises interest rates, it reduces the overall risk of increased inflation.
How Hedging Applies to Personal Finances
So what does hedging have to do with personal finances? In short, hedging your financial investments by securing less risky assets serves as an insurance policy. When inflation occurs, hedge investments help protect an individual’s overall capital.
People can accomplish hedging through a number of avenues, primarily through diversifying a financial portfolio. Having stakes or holdings in a variety of different types of assets, including land, residential or commercial properties, metals, bitcoin, other low-risk cryptocurrencies, and more.
It goes without saying, THIS IS NOT FINANCIAL ADVICE. Speak to your financial advisor to learn more about which diversified assets might best suit your current portfolio and potential.
How Would Bitcoin & Crypto Act as an Inflation Hedge
Bitcoin and other cryptocurrencies can work as a hedge investment during times when monetary inflation causes inflation. Bitcoin and other currencies have a fixed supply that cannot increase arbitrarily by government entities, meaning it cannot become devalued in that manner.
Buying Early and Price Performance
Many people see cryptocurrencies as risky assets, citing the seemingly volatile stock price of currencies such as bitcoin.
However, with early investment and long-term holding, some cryptocurrencies prove to be very stable non-cash assets. Bitcoin, for example, has steadily increased in value despite periods of value downturn.
Early investment in select cryptocurrencies may allow investors to take advantage of the steady rise and gain net profit while protecting against the inflation-based devaluation of the dollar.
Cash vs. Asset Value
One of the primary benefits of investing in a crypto inflation hedge is that crypto can hold value even when cash asset values fall. In individual economies, fiat currencies may lose value due to increases in the CPI or monetary expansion. In either situation, adopting cryptocurrencies on a national and personal level revitalizes trade. It makes it possible to acquire goods and services without racking up immense debt or by further devaluing fiat currencies.
Bitcoin and Crypto vs. Other Types of Assets
Compared to other non-cash assets, cryptocurrencies provide somewhat more stable insurance against rising inflation. Unlike a house, for example, cryptocurrencies do not require additional investment in order to maintain value.
Why Bitcoin & Crypto May Not Hedge Inflation in 2022
The inflation issue in 2022 has multiple sources. While some economists or financial experts support investment in crypto as a way to hedge against inflation long-term, these investments may produce little immediate result.
Part of the problem with U.S. inflation issues in 2022 centers on increases in the consumer price index. This means that consumers pay more and more for goods and services.
Cryptocurrencies can only do so much to help against these rising costs. A bitcoin inflation hedge may protect the overall count of your assets but cannot protect against the devaluation of currencies caused by rapid increases in the price of goods and services.
Potential Price Performance Instability
In addition to CPI increases, the rapid fluctuations of some currencies in the market may make immediate benefits from crypto inflation hedge investment even harder to achieve.
Bitcoin and Crypto vs. Fiat Currency: The Long-Term Outlook
While immediate investment in stable crypto markets may prove difficult or unproductive for new investors at this time, the long-term outlook for a potential crypto and bitcoin inflation hedge looks good.
Reduced Risk of Manipulation by Government Entities
Crypto markets are finite and cannot be expanded, making them less susceptible to market manipulation via government entities.
When governments and other agencies cannot change the value of a given currency at will, it helps solidify a baseline value of that currency. Finite resources have a finite value.
Economic Protection From Devalued Fiat Currency
In national economies where fiat currencies have devalued, cryptocurrency already offers a viable substitute. Economists continue to watch real economies put bitcoin and cryptocurrencies to the test as a stand-in for traditional currencies.
In these situations, economies and individuals can resume the purchase of goods and services despite a total loss of value of their established currencies. In this way, crypto has protected entire economic systems from total collapse caused by rising global inflation.