Understanding the Impact of Inflation on Traditional Currencies
One of the reasons why Bitcoin gained its popularity in the beginning of its history is the collapse of the US mortgage market that caused the global financial crisis of 2008. The immense power of the shockwave sent around the world forced everyone to see the downsides of an economy regulated by central banks and huge financial institutions. To bail out banks, the government printed some more money and managed to stabilize the situation.
However, nothing has been the same since then. Inflation numbers have been crawling up in many western economies despite the best efforts from central banks to contain the issue. There are several factors that cause the instability in the global economy and reducing the purchasing power of traditional currencies:
- The effect of severe worldwide instability caused by climate disasters, war, and disease. While many people in developed countries do not notice many issues plaguing the third world, food insecurity and energy shortages affect even advanced economies either directly (through import and export or immigration) or by proxy (disrupted supply chains). Many western economies like Germany, Italy, and Great Britain struggle to cope with the fallout of recent global events.
- The Growing inequality. The disparity between the rich and the poor in most developed countries is becoming way too large to ignore. The accumulation of wealth often leads to the reduction of economic growth as consumption starts falling and wages begin falling behind increasing costs of living. This situation is clearly visible in Canada, the UK, the US, and many other countries that have fiat currencies that form the backbone of the global monetary system.
- The housing crisis. Each country experiences it differently. However, the recent collapse of multiple Chinese developers and the loud voice of protestors in Canada, two politically antagonistic states, show that the issue is troubling in all developed economies. When prices go up so rapidly against fiat currencies, uncertainty and anxiety within countries build up.
Despite the best efforts from the US treasury and many central banks across the globe trying to push the narrative that financial stability will not be disrupted, people know that they are being lied to. The rising inflation can be felt in every sector of any economy with prices on necessities and food growing faster than wages.
Why Cryptocurrency is a Viable Option for Protecting Against Inflation
Satoshi Nakamoto, the anonymous developer of the Bitcoin protocol, gained notoriety thanks, in part, to his message: the world needs a decentralized currency that can be detached from governmental agendas and the influence of private capital. Bitcoin was meant to be the new form of money, a perfect exchange medium that cannot be tampered with.
While this particular idea about it becoming money is still being challenged by many financiers, even the biggest opponents of the very concept of decentralized digital money cannot argue against some of the cryptocurrency benefits.
Here are some reasons why Bitcoin is a good inflation protection from any fiat currency including the US dollar:
- The limited supply. One of the reasons, but not the only or even most significant, why inflation grows is that money can be printed effortlessly whenever the government needs. When the US dollar was pegged by gold, the inflation was never higher than 3% which is a healthy level for a growing economy. However, it has been jittery at best and devastating at worst after the US decided to detach its fiat currency from gold. There will never be more Bitcoin than initially planned due to the core design of the protocol.
- Decentralization. The Bitcoin community loves the idea of having a form of money that cannot be taken away or influenced by governments. Even if the “Big Daddy” decides to destroy some huge data centers holding information about the digital ledger of Bitcoin, it will be preserved, due to its decentralized nature, on thousands of individually owned machines. No one can stop Bitcoin or destroy it completely until at least a couple of PCs with a copy of the ledger exist in the world.
- Independence from the global economy. While all fiat currencies are inherently tied to their national economies and monetary systems, Bitcoin does not have a central authority or a printing press situated in a capital of a biased state. Regardless of what will happen in Greece or Moldova, it will never affect users of the token in the US or Germany. Even political and financial sanctions cannot prevent people from using crypto.
A Step-by-Step Guide: Using Cryptocurrency to Safeguard Your Savings and Beat Inflation
We won’t go into specific details of how to use certain cryptocurrencies as the number of viable tokens is far too big to cover within the confines of a single article. However, there are some easy-to-follow steps that you can do to start protecting your capital from the rapid inflation.
Educate Yourself on Different Types of Cryptocurrencies
First and foremost, you need to select interesting tokens to invest in. The choice should be informed by several important factors including utility, future prospects, and the rate of adoption. If you want to use your tokens on a daily basis, you should choose something that many businesses accept as payment. If you are interested in hedging against the inflation in the long term, focus on tokens that will be appreciating in value.
Here are some good examples of cryptocurrency types that may be viable substitutes for the US dollar:
- Bitcoin is the king of the cryptocurrency hill. It is a Proof-of-Work network that started the whole crypto craze. The rate of adoption of this token it relatively low among businesses and various societies despite the narrative hyped up by the crypto community. Even the El Salvador experiment of switching its whole economy to Bitcoin failed miserably. Nevertheless, $BTC will be growing in value regardless of its adoption rate.
- Ethereum is another good storage of value. While many think that $ETH will be used as money, its power is in the huge ecosystem. Since staking in this Proof-of-Stake network is so profitable and provides a fixed income to investors, it will never become a new global exchange medium. People must be encouraged to spend their money instead of hoarding it.
- Monero may be a good candidate for the most used token as it provides anonymity and privacy to its users. Many companies and businesses use $XMR regularly to pay for legal and, unfortunately, illegal products and services. The growing popularity of this token should not be ignored by people who are looking for an alternative to traditional fiat currencies.
Create a Secure Wallet for Storing Your Cryptocurrency
This step should be taken very seriously. A good wallet will guarantee the safety of your coins, but users take on the responsibility of taking good care of their key phrases and other security information. Compromising the security of your wallet can have a devastating effect on your finances.
There are several hugely popular crypto wallets that an avid user of digital coins must have:
1. MetaMask is a must-have wallet for Ethereum tokens and ERC-20 tokens which are usually minted by L1 and L2 platforms of the Ethereum ecosystem. Some EVM-compatible tokens can be also stored in MetaMask.
2. Bitcoin Wallet is the most popular storage application for $BTC investors and users. It is quite easy to understand and use. There are many ways to using this particular application. It also has some very strong security features.
3. If you are worried about the crypto wallet security, consider getting a hardware wallet like Ledger Nano or Trezor. These compact devices are quite expensive. However, they provide a good range of features to help users navigate the complicated world of cryptocurrencies.
Choose the Right Exchange for Buying and Selling Crypto
To get some crypto, you need to have a place to buy and sell tokens. There are two types of exchanges in this industry:
1. Decentralized exchanges which usually do not take users’ money into custody and offer a wide range of financial services without controlling the free market. Many DEX platforms facilitate peer-to-peer transactions and offer escrow wallet addresses to protect market participants from fraud.
2. Centralized exchanges are owned by corporate entities and usually provide custodial services alongside a rich selection of other products like margin trading, derivatives, staking, NFT trading, and more. CEX platforms can be risky and dangerous, but they are also convenient and user-friendly.
Some old school Bitcoin users still consider P2P marketplaces the best way of selling and buying tokens, but the contemporary crypto exchange selection is diverse enough to offer P2P services within their ecosystems (for example, Binance has a very good P2P marketplace).
Diversify Your Crypto Portfolio to Minimize Risk
Some hodlers believe that Bitcoin is the only thing that you will ever need, but smart investors try to diversify their capital across multiple popular tokens with utility and the potential for growth. It is a good idea to focus on diversifying crypto investments and holding $BTC alongside $ETH, $XMR, $XRP, and $LTC as well as $ADA and $USDT.
You can also use other forms of hedging like running DCA bots provided by automation vendors like WunderTrading or using short market positions against your crypto holdings.
Stay Updated with Crypto News and Market Trends
Shuffling your portfolio from time to time depending on ongoing trends in the crypto market is a very good practice that often yields short-term profits for its users. There are several ways of receiving and interpreting crypto market updates:
- Use technical analysis to receive signals and track price action of multiple digital assets that you are interested in.
- Subscribe to newsletters that provide valuable insights and relevant information about the situation in the crypto industry.
- Frequently visit forums and social media hubs where crypto enthusiasts discuss recent news and press releases.
- Listen to podcasts and watch news from mainstream media to look at the crypto market from different points of view.
Hold onto Your Crypto Assets Long-Term
A surprising amount of crypto enthusiasts believe that the only valid way of investing in crypto is following the “HODL” mantra. If you want to protect your finances from the inflation, holding your tokens for a long time is a good idea since this strategy will pay out greatly somewhere far into the future.
If you also stake your tokens to receive annual interest around 5.5% with an inflation hovering above 5% YoY, the overall real profit will be close to 10% — 15% per year depending on price fluctuations and inflation levels. Such long-term strategies are not for everyone so think twice before committing to certain tokens for years to come.
The Risks Involved in Using Cryptocurrency as an Inflation Hedge
While Bitcoin and many other tokens seem like a perfect bet against the inflation of fiat currencies, there are many issues that increase the risk for your portfolio if you commit to investing exclusively in crypto:
- Price volatility. Since all tokens are inherently speculative assets, their prices change dramatically and unpredictably. It is possible to lose everything in the crypto market if you do not make adjustments along the way.
- Regulatory challenges are also a big deal as many individual users will never tough cryptocurrencies if they are not allowed by their local governments. Strict laws and regulations severely reduce the adoption rate and threaten many tokens including Litecoin, Bitcoin, Ethereum, Monero, and many others.
- Many tokens have security vulnerabilities. While Bitcoin holders using wallets to store their capital usually stay safe, people who use poorly designed smart contracts and engage with untested DeFi platforms risk losing their capital to hackers and exploiters.
These cryptocurrency risks scare away large financial institutions with sufficient capital to prop up the crypto industry to new heights. Whether the industry can find appropriate solutions to these problems is a whole new can of worms that we will not open in this article.
Tips for Maximizing the Benefits of Cryptocurrencies in a High-Inflation Environment
The best tip for all investors who want to use digital tokens as protection from inflation is to acquire as many tokens as possible at the best prices. There are several ways of accomplishing this task:
- Use automated social trading if you do not have the necessary expertise to trade crypto. Copy trading is a good way of buying tokens. You simply need to follow an expert and copy their trades. Many of these traders work on the spot market where you can simply turn off stop-loss order placement to hold long market positions indefinitely.
- Employ DCA bots. Distributed cost average is the best approach to purchasing financial assets over time while keeping the cost of investment below the market average. Companies like WunderTrading offer preset DCA bot solutions that can be launched in a couple of minutes with minimal tinkering on your part.
- Use various hedging strategies against inflation. The best idea is to allocate your capital in assets that are based on real investments (real estate, stocks of companies with infrastructure, etc.) or in the crypto industry if you have a strong belief that it will remain strong and potent when the fiat system collapses.
There are many other cryptocurrency tips, but we strongly recommend focusing on timing your crypto investments. Again, systems like DCA can help you out. Do not buy high or sell low and relocate your capital before inflation reduces its purchasing power.
The Future of Cryptocurrencies as an Anti-Inflation Tool and Saving Mechanism
The whole financial world is hectically looking for a good hedge against the fiat inflation as experts observe the slow collapse of the global financial landscape. We know that the current monetary system is doomed and that we won’t have functional societies in some parts of the developed world within the next couple of decades.
Smart people are trying to identify where to allocate their capital before it is completely eaten by the inflation and rapidly increasing costs of living in many advanced nations. While many believe that the best bet is real estate or precious metals, crypto enthusiasts have faith in the bright cryptocurrency future with Bitcoin, Ethereum, and other massively popular tokens reigning over the international trade.
As many such ecosystems have limited supplies of tokens and can reach incredibly high market caps, anti-inflationary mechanics are already in place. If some of them reach mainstream adoption in at least one major economy, we will have no doubts that cryptocurrencies will take over the world.