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Historic inflation is pushing the price of pretty much everything higher than it’s been in years. Except for the crypto market, which is moving fast in the other direction.
Bitcoin saw a nearly 40% drop in June, hitting a low point below $18,000. Ethereum’s price dropped by nearly 50% in June, going as low as about $900 at one point. Between the Fed’s regular and ongoing interest rate hikes, conflict abroad, and continued supply chain disruptions, it appears likely that high inflation will last into 2023. It remains to be seen how ongoing inflation will affect the crypto market, but more volatility is a safe bet.
Historically, cryptocurrency experts and investors touted bitcoin, the original crypto, as an inflation hedge because of its limited supply of 21 million and speculative nature. Bitcoin’s value is, in theory, uncorrelated to the stock market, putting it in a category of investments known as “alts” (alternatives) alongside fine art, wine, and precious metals.
But the crypto market has increasingly tracked the stock market in recent months, suggesting it isn’t as untouchable as early adopters say. In May, an algorithmic stablecoin known as Terra (UST) crashed, wiping out $400 billion in crypto market capitalization within a few days.
It’s been a perfect storm, and crypto investors are left to wonder how long-term inflation could impact their holdings. To find out, we asked two financial experts how long-term inflation and crypto are related, and what investors should do to navigate the uncertainty.
How Long-Term Inflation Could Impact Crypto
Crypto is too young of an asset class to know for sure how inflation will affect it, says Brandon Neal, chief operating officer at the DeFi lending protocol Euler and former trader at the Federal Reserve Bank of New York.
“It might not have necessarily been true that crypto was a good inflation hedge. It may have just been coincidental and that, up until now, crypto merely looked like it was a good inflation hedge,” Neal tells NextAdvisor.
Look at gold, for instance: “If you just decided to cherry pick points in time, certain data points throughout its history, sometimes you could look at gold and say it is an excellent inflation hedge — but you’d have to ignore all the times it simply wasn’t.”
More likely, argues Neal, is that bitcoin has created the illusion of a hedge since it was first launched in 2009. But that’s just 13 years of data during a period of historically low interest rates, so it’s impossible to tell whether this will continue to be the case moving forward — especially given how markets and global circumstances have changed.
Chris Brendler, managing director and senior research analyst at D.A. Davidson, says bitcoin could become a good hedge against inflation over time because it’s decentralized and not tied to any central bank, but the current volatility and speculation in the crypto market are overpowering bitcoin’s underlying value since it’s still a new asset class.
The crypto market has been tracking the stock market recently because trading sentiment is taking over the near-term movements and so much of it is “tied to speculation,” Brendler said.
“If there’s a lot of money printing going on, bitcoin should hold its value [over time],” he says. “What we don’t know is how much of it is speculation, and we’re continuing to see that come out. I think it will be proven over time to be an inflation hedge, but not this time.”
What Does Inflation Mean for Crypto Investors?
So if bitcoin — and crypto generally — isn’t the inflation hedge many thought, what role does it have in your portfolio?
“If inflation erodes the value of a dollar over time, people often look for assets that can consistently outgrow the increase of inflation,” wrote Lindsey Bell, chief markets and money strategist for Ally in a February newsletter. “Crypto’s big moves in a year like 2021 had some people feeling digital assets could serve that purpose.”
But as recent weeks and crashes highlight, crypto investing is still highly speculative, especially given that several of the most promising cryptocurrencies today have only been around since 2016 or later. Expect the volatility to continue, experts say, especially amid the broader economic uncertainty we are seeing right now.
Despite what many early believers have predicted, Neal doubts crypto and decentralized finance (DeFi) will replace the role of legal tender — aka the U.S. dollar and other fiat (government) currencies.
“I’m very excited in the long run about the vision of crypto and ancillary innovations like DeFi,” he says. “But I do think it’s important to be realistic in the short- and intermediate-term that the existing system is going to be around in some form or another for quite a while. Legal tender status really, really does matter.”
But in an increasingly globalized world, that’s not to say crypto doesn’t still have interesting use cases that could support long-term value growth.
Russia’s recent invasion of Ukraine, along with the war that followed, offers an example of how crypto continues to offer opportunity even if its value is leaving plenty to be desired among investors.
Anna Vladi, founder at METL, a company that develops tech allowing consumers to buy crypto through the Automatic Clearinghouse (ACH) network, encouraged her remote, Ukraine-based employee to accept a portion of her salary in stablecoins prior to the February 2022 invasion by Russia. This would in theory offer a way to shelter some liquid assets from an invading hostile power and the uncertainty that comes with war.
“I always paid her by wire in U.S. dollars,” says Vladi. “But eventually, when the rumors were circling around, I [asked] her … ‘Do you think maybe you want to at least partially take something in crypto because if anything does happen … there’s going to be sanctions … funds are going to be frozen? You want to have alternatives, and this way, you can get out.’”
Vladi’s employee evacuated to Greece, where she was able to transfer her stablecoins back to dollars and cash out. This was fortunate, says Vladi, while her home country lived in fear of a bank run.
The decentralized nature of crypto makes it possible for refugees to exchange money, buy goods, and barter, Vladi says.
“Everybody downloaded MetaMask [digital wallets] and people started paying each other for different things — diapers, baby food, whatever it was … I truly believe in emergency situations just like this, this is when [crypto’s value] comes to light.”
How to Inflation-Proof Your Portfolio
So if bitcoin isn’t exactly the inflation hedge it’s been made out to be, what does it mean for investors? Is it still worth holding in your portfolio, or sticking to an investment strategy that includes a share of crypto?
Pro Tip
Diversification is the best inflation hedge — not a single asset class in itself.
Experts say diversification is still the best inflation hedge. Diversification simply means adding a robust array of different asset classes — stocks, bonds, ETFs, and index funds — to your portfolio.
For crypto-curious investors, financial planners and other experts recommend keeping crypto investments to less than 5% of your overall portfolio. They also say it’s smart to invest in crypto only what you’d be OK losing if its value dropped to zero. And you shouldn’t invest in crypto before building an emergency fund and paying off any high-interest debt.
The majority of investments, experts say, should live in broad-market funds that comprise several sectors. ETFs can help diversify your portfolio better than cherry-picking individual stocks, and this spreads out the risk (if one company tanks, there are still many more doing OK in your portfolio). There are even blockchain ETFs, which let consumers invest in companies known to have either invested in blockchain or that incorporate the crypto technology into their business.
FAQs
Why is crypto not an inflation hedge? ›
Crypto can act as protection against inflation, but not until it establishes its fundamentals and achieves mass adoption. In theory, Bitcoin (BTC) should serve as a hedge against inflation. It's easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.
Why is cryptocurrency an inflation hedge? ›Historically, cryptocurrency experts and investors touted bitcoin, the original crypto, as an inflation hedge because of its limited supply of 21 million and speculative nature.
What does it mean for a crypto to be inflationary? ›An inflationary cryptocurrency is one with an increasing number of tokens in circulation. Some of the common approaches for introducing new tokens through mining, staking, and other methods can help in increasing the circulating supply of tokens. The increasing supply of the token would cause a drop in its value.
Are cryptocurrencies a good inflation hedge? ›Bitcoin is often compared to gold as a hedge against rising inflation. However, the most popular cryptocurrency doesn't exactly move in tandem with consumer prices. Over the long term, Bitcoin has been one of the best assets to own, helping investors raise their purchasing power.
Is crypto the answer to inflation? ›Crypto Is Not Currency
Cryptocurrency is not currency, which means it doesn't respond to inflationary pressures like a foreign currency would. Many advocates of cryptocurrency argue that this is a counter-inflationary asset. As the value of your money drops, the value of your cryptocurrency will increase.
One of the prime reasons cryptocurrencies provide a better shield is their limited supply. Most cryptocurrencies have a fixed supply which means new coins/tokens can't enter circulation, curtailing the possibility of rising inflation.
Is crypto a good hedge against a recession? ›Crypto is no safe haven
As investors weigh the possibilities of a recession or a stagflationary environment, many are looking for assets to protect them from the potential storm. But experts say crypto isn't the place to find it.
Gold and crypto have been called 'inflation-proof' investments—so far in 2022, neither seems to be a great hedge. Gold and cryptocurrencies are often lumped together as inflation-proof investments, but with prices rising at their fastest pace in decades, neither asset has performed well amid rising inflation in 2022.
Which cryptocurrency is the best hedge against inflation? ›One that might come to mind is Bitcoin (BTC 2.01%), the most valuable cryptocurrency today. It has been touted as a hedge against inflation since it was created in the aftermath of the Great Recession in 2009.
Is Shiba Inu inflationary or deflationary? ›What cryptocurrencies are deflationary? Examples of deflationary cryptocurrencies include Bitcoin, BNB, XRP, Shiba Inu, and Polygon.
Which crypto coins are inflationary? ›
Bitcoin is both an inflationary and deflationary currency. The number of tokens increases over time; Bitcoin is technically inflationary. However, BTC has a cap of 21 million units and uses the halving process, which means the number of mined Bitcoins is cut in half every four years to curb its demand.
Will inflation drive people to crypto? ›If inflation erodes the value of a dollar over time, people often look for assets that can consistently outgrow the increase of inflation. Crypto's big moves in a year like 2021 had some people feeling digital assets could serve that purpose.
Does crypto crash with inflation? ›Bitcoin is Acting Like a Stock
That means inflation doesn't affect the top cryptocurrency. It might not be the case always, since inflation data has affected Bitcoin's price this year. That's why there has been a historical correlation between the stock market and cryptocurrency volatility.
It's abundantly clear that during periods of slowing economic growth cryptocurrencies are not spared. In fact, they're often hit the hardest. When recession fears arise, it isn't uncommon for cryptocurrencies to lose three-quarters of their value during these times.
Will crypto survive a market crash? ›(See also: Bitcoin Vs. Litecoin Vs. Dogecoin.) Nolan Bauerle, research director at CoinDesk, says 90% of cryptocurrencies today will not survive a crash in the markets.
What does it mean to hedge your crypto? ›Hedging bitcoin, or any cryptocurrency, involves strategically opening trades so that a gain or loss in one position is offset by changes to the value of the other position.
What is the #1 hedge against inflation? ›Buy Treasury Bonds
There are two popular types of treasury bonds that are good investments for individuals who are worried about inflation: Series I Savings Bonds. Series I bonds are interest-bearing government savings bonds. They are a low-risk option that earn interest and are protected against inflation.
So, whatever its proponents may say about its utility as a hedge against market downturns, crypto has served as more of an anti-hedge, with its correlation with the S&P 500 rising as stocks plunge.
Is there any chance of Shiba Inu reach $1? ›If Shiba Inu pulls a similar move in 2022, it could easily trade at $1 by the end of 2022. However, taking a more conservative approach to the price of SHIB, 2030 seems like the earliest it can trade at $1. The assumption here is that SHIB keeps rallying by a couple of thousand percentage points every bull cycle.
Will Shiba ever reach a $1? ›If Shiba Inu were ever to reach $1 per token, this would mean that the cryptocurrency network's entire market value would be a whopping $549 trillion. That's more than the amount of total global wealth, as estimated by consulting firm McKinsey & Co. Clearly, this aspirational price target is all but impossible.
Is Shiba still worth buying? ›
Essentially, Shiba Inu is one of the cryptocurrencies that stand to do well in 2022 and the years to come. So, ultimately, Shiba Inu is a cryptocurrency worth investing in 2022. To buy Shiba Inu, one of the best exchanges to use is eToro. Opening an eToro account is pretty straightforward.
Which crypto are not inflationary? ›The best cryptocurrencies you can use to hedge against inflation are coins with limited supply and strong adoption. The 2 best cryptocurrencies to use as a hedge against inflation are likely Bitcoin and Ethereum.
How do you know if a coin is inflationary? ›There are two broad groups of currencies out there: inflationary and deflationary. Inflationary currencies have no limit to how many units are in circulation, while deflationary currencies have a max supply.
What is inflationary and deflationary crypto? ›There are two broad groups of currencies out there: inflationary and deflationary. Inflationary currencies have no limit to how many units are in circulation, while deflationary currencies have a max supply. Other factors remaining the same, the buying power of inflationary currencies reduces as more units are printed.
Is ethereum inflationary or deflationary? ›Since the passage of EIP-1559, we've seen Ethereum become deflationary before. This is the first time it has happened since the merge. What makes it so significant this time around is the new coin issuance is now so low that it didn't take a large boost to network activity to turn the coin into a deflationary asset.
Is Dogecoin inflationary? ›Dogecoin has a diminished inflation rate because it has a fixed yearly issuance of 5 billion coins. This means that each year, the rate of inflation decreases comparative to the total supply, and in a very predictable way, making Dogecoin the perfect candidate to be used as a currency.
Is crypto likely to crash again? ›The crypto market has crashed before, and it will likely crash again so it's important to be ready. Cryptocurrencies are notoriously volatile and risky, so investors can see market swings of more than 50% in a matter of months and as much as 15% price gains within 24 hours.
Can crypto survive the crash? ›(See also: Bitcoin Vs. Litecoin Vs. Dogecoin.) Nolan Bauerle, research director at CoinDesk, says 90% of cryptocurrencies today will not survive a crash in the markets.
What does it mean when a crypto is deflationary? ›Deflationary cryptos
With deflationary cryptocurrencies, the supply of coins will decrease over time instead of increasing. This means the value of each coin will rise if the demand remains consistent.
deflationary cryptocurrencies is determined by the number of tokens of the specific cryptocurrency in circulation. The greater the number of coins of any cryptocurrency in circulation, the lower the value.
What does it mean when a crypto becomes deflationary? ›
A deflationary cryptocurrency is a form of cryptocurrency with a depreciating supply of coins. In simple terms, the number of coins in circulation decreases, making an individual coin more valuable. Deflationary cryptocurrencies often have a fixed, maximum supply cap embedded within their code that cannot change.
Is Solana inflationary? ›Solana's initial inflation rate is 8% annually, decreasing by 15% YOY, reaching a long-term fixed inflation rate of 1.5% annually. 100% of the inflationary issuances (rewards) are delivered to delegated stake accounts and validators.
Is Bitcoin is an inflationary currency? ›Using the traditional definition, Bitcoin is inflationary because the supply of Bitcoin increases over time. Gold is considered the ultimate store of value because of one specific characteristic: scarcity.
Is Ethereum a good hedge against inflation? ›The best cryptocurrencies you can use to hedge against inflation are coins with limited supply and strong adoption. The 2 best cryptocurrencies to use as a hedge against inflation are likely Bitcoin and Ethereum.
Is Shiba inflationary? ›The token is deflationary, which means there is no maximum limit on the number of SHIB tokens. The market has been on a bearish trend since the start of this week, and Shiba Inu is no exception, said Edul Patel, Co-Founder and CEO of Mudrex.
How high Dogecoin can go? ›The coin has already surpassed this point and might be trading way above it by 2025. Overall, according to predictions from most analysts, Dogecoin might go above $1 by 2025. However, given the high volatility, the coin might be higher or lower than this level by 2025.