Can cryptocurrency protect against inflation? And have major tokens like Bitcoin and Ether replaced gold as a go-to choice for investors looking for a ‘safe haven’?
Inflation is one of the major financial concerns facing investors and consumers this year, with many looking for alternative investments or ‘safe havens’ to protect their funds and hedge against inflation. Cryptocurrency has emerged as a popular choice for investment during times of high inflation, but how do investors choose which tokens to buy?
The financial markets have faced some pretty turbulent times of late. War in Ukraine, the coronavirus pandemic, and the energy crisis have triggered many reactions around the world and added to what was already rising inflation in Europe and the US. Whilst different markets have been affected in different ways, the current economic situation has meant investors need to reconsider their strategies.
In the following article, we’ll be taking a closer look at how inflation affects investors as well as how cryptocurrency measures up as a hedge against it. We’ll also put forward some suggestions for tokens we think are good options if you do decide to use crypto to try and beat inflation.
What Is Inflation?
Before we delve into cryptocurrency investment options to hedge against inflation, we should probably take a moment to look at exactly what inflation is. In the simplest sense, inflation is when the prices of goods rise, essentially rendering cash less valuable in terms of buying power. It is usually expressed as a percentage.
To give a simple example of how inflation affects things, imagine you spend $10 a week buying bottles of cola at $1 each. At this price, you can buy ten bottles. However, if the price of cola increases to $1.25, then suddenly your $10 will only buy you eight bottles. This means the purchase power of your dollar has fallen. Of course, 25% inflation would be pretty significant - not to mention alarming - but you get the idea.
How is Inflation Measured?
Inflation does not affect just one product or service at a time so in order to measure it over time, bodies like the UK’s Office for National Statistics must track the prices of a diverse range, or ‘basket’, of items to give an overall figure for inflation.
In the UK, this ‘basket’ is comprised of over 700 items and services, including energy and food prices, as well as more significant items like automobiles and even holidays. The selected items act as a sample to give us a picture of how much prices are increasing (or decreasing) overall.
Why is Inflation a problem?
Economists generally believe that some inflation is a good thing, as it means that a country’s production remains high. If inflation is too low, or non-existent, then it has been suggested that this would lead to less demand for goods and a reduction in lending and borrowing, which in turn would reduce consumer spending.
The Bank of England sets a target inflation rate of 2%. However, at the time of writing, that figure stood at over 10%, with analysts expecting it to increase further. This is not great for consumers, who must now pay more for goods. But what about investors?
Investors obviously need their investments to outperform inflation to make decent returns. This puts pressure on their portfolio and asset choices. It also affects asset prices, as many investors and traders will look to offload lower-earning assets, which will force their prices lower.
Cryptocurrency and Inflation
When it comes to cryptocurrencies, things are different - though inflation is still a factor. In fact, most tokens will have an inflationary or deflationary mechanism embedded in their code. For example, Bitcoin has a limited token supply of 21 million and the number of tokens being released into the system is halved at regular intervals.
This mechanism serves to control Bitcoin inflation, as its scarcity increases over time, meaning that, in theory, its value and buying power, actually increase over time. Other tokens, however, have different approaches.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Is Cryptocurrency A Safe Haven Investment?
Over the years, cryptocurrency has been touted as a replacement for cash, the future of commerce, and even digital gold. Whilst it's fair to say none of these have become a reality, the current economic turmoil and soaring inflation have seen the conversation start again - particularly that cryptocurrency is the answer to the woes of the financial markets. But is cryptocurrency a safe haven investment during inflationary times?
Cryptocurrency vs Cash
As central banks continue to hike interest rates continue to try and curb inflation, many people assume that a savings account is the best place for their funds. Of course, they can be forgiven for thinking such, however, this is rarely a good option. Why? Because the major banks have hardly been forward in passing on higher interest rates to savers.
At the time of writing, the highest savings account rate stands at 3.25% and this rate is only available subject to certain conditions. Given that inflation has hit 10.1%, this means that the best savers can hope is to lose over 7.75% off of the real value of their savings. As such, savings accounts are not a good option if you are trying to hedge against inflation.
Cryptocurrencies, on the other hand, have seen four-figure percentage price increases in recent years. Whilst they may be notoriously volatile, ultimately the value of the major tokens has increased year-on-year. Bitcoin is, of course, the best example of this.
Cryptocurrency vs Stocks
Another option for hedging against inflation is the stock market. Equities often see better returns than traditional savings accounts and with retail investment sites becoming more accessible, it's never been easier to buy shares. However, high inflation rates hurt stocks as consumer spending drops which inevitably affects the value of firms and the wider economy.
Investors only have to look at the major markets to see the effect of high inflation. With the exception of the US, most markets are faring badly. Of course, some forward-thinking investors may see an opportunity here - as the UK and European markets remain subdued, now could be a good time to buy.
However, in terms of protecting against inflation, investors will be under pressure to find stocks that can return more than 10%. Most major funds are unlikely to see these sorts of returns either - maybe 5% or 6% but not 10%. Cryptocurrencies may be more volatile than stocks, but they have demonstrated their ability to yield significantly higher returns in recent years.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
What Kinds Of Cryptocurrency Can Protect Against Inflation?
When it comes to hedging against inflation, investors need to consider their expectations. Realistically, if we are looking at storing value, then it’s better to choose the cryptocurrencies that have generally lower risk. Such a strategy may exclude emerging tokens that have the potential to yield huge returns, but the goal here is to preserve value.
Investor sentiment
Lager institutional and mainstream investors favour certain cryptocurrencies over others. It's hard to argue that Bitcoin is anything other than the number one choice for the major firms out there, including the likes of Tesla, Block, and Coinbase. Having the backing of mainstream investors can in itself lend stability to a particular cryptocurrency and, if nothing else, the more inexperienced investors out there can certainly take notes from the major players when it comes to hedging against inflation.
Real-world use case
If you’re considering buying cryptocurrency to hedge against inflation - or for any other reason for that matter - it’s always important to consider a project’s real-world use case. For example, projects like Dogecoin and Shiba Inu have very little intrinsic value for any particular industry and their prices are largely driven by community trends. On the other hand, Ether is the token of the world’s number one smart chain, meaning it is always likely to be in high demand.
Stability
It’s probably fairly obvious that a cryptocurrency’s stability is a major consideration for investors looking to hedge against inflation. We’re not just talking about price here either - investors need to choose projects that are established and unlikely to crash, repurpose or experience legal issues - the Terra Luna and Do Kwon saga being a good example of what investors want to avoid. When it comes to price stability, stablecoins may immediately spring to mind. However, investors will need to consider the currency that stablecoins are pegged to.
The Best Cryptocurrencies To Invest In During Inflation
What follows is a selection of tokens that we think are good options for anyone looking to use cryptocurrencies to trade during inflation - particularly for investors looking for ‘safe haven’ options. Of course, this list isn’t exhaustive, but it presents some good options for trading during inflation.
Bitcoin
It may be an obvious choice, but Bitcoin should be a top consideration for any crypto investment portfolio. Despite being the oldest coin on the market, Bitcoin still leads the way when it comes to price and mainstream investor backing. As the cryptocurrency market rebounds, it is Bitcoin leading the way and it is still the best option for anyone looking to gain exposure to cryptocurrency in general, as it serves as the benchmark for the wider market.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Ethereum
Ethereum is a good option for buying during inflation as it ticks quite a few boxes. Most importantly, it is the most established smart chain by a considerable margin. Several of the world’s top DeFi, metaverse, and Web 3.0 projects run on Ethereum, making Ether one of the most in-demand tokens in existence. The ongoing upgrades and the shift to proof-of-stake mean Ethereum is also likely to be able to stay in tight competition with newer smart chains, despite having launched back in 2016.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
XRP
Known as the bankers’ cryptocurrency, Ripple’s XRP has been a mainstay in the top five cryptocurrencies by market cap. It is also one of the most well-established projects out there, having first launched in 2012. It seems XRP has weathered the storm of its legal tussles with the SEC and has been one of the first tokens to bounce back following the downturn that struck the cryptocurrency market in the first half of 2022.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Tether
Tether USDT is an interesting option for trading during inflation. Of course, this cryptocurrency is pegged in value to the US dollar and the whole point of stablecoins is that they do not experience the wild price fluctuations seen elsewhere in the cryptocurrency market. That being said, at the time of writing, USD is the strongest fiat currency in the world and the US economy is faring better than most. As such, Tether is a solid option for storing value in times of inflation - particularly in between other cryptocurrency trades.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Binance Coin
Binance Coin (BNB) is another mainstay in the top five cryptocurrencies by market cap. The native token of the world’s biggest cryptocurrency exchange, Binance entitles users to get cheaper rates when buying and selling crypto. As such, it is always in fairly high demand and when the cryptocurrency market is healthy it is usually reflected in BNB’s price. This makes BNB another great option for trading cryptocurrency during inflation.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
How To Trade Cryptocurrency During Inflation
If you want to trade cryptocurrency during inflation, then you’ll find that the process remains the same as at any other time. The main consideration if you are trying to beat inflation will be how long you can tie up your capital and how any particular token(s) you buy fit with that timescale.
Acquiring cryptocurrency itself is relatively straightforward. You simply need to take the following steps:
1: Get a cryptocurrency wallet
Get yourself a versatile and secure cryptocurrency wallet. There are plenty of options here, including both hardware and software wallets. Some exchanges will also include a wallet as standard, which you can either use as your primary wallet or in addition to another desktop/hardware wallet for additional security.
2: Open a cryptocurrency trading account
Once you’re set up with a wallet, you’ll then need to find a broker or exchange that can give you access to the market and open an account. You have a lot of options here, but we recommend eToro for most investors. It’s one of the top platforms in its field and is particularly noted for its award-winning trading platform and wealth of information and learning resources.
3: Plan and execute your trades
Now you’re ready to start buying/exchanging cryptocurrencies. Before you start building your portfolio, we’d recommend conducting plenty of research and considering what you expect from your investment - are you looking at a long-term strategy or do you plan on trading cryptocurrencies to take advantage of short-term volatility?
4: Monitor your portfolio
Platforms like eToro offer a huge amount of tools and resources for monitoring the market and keeping track of your portfolio. This should be a priority for all cryptocurrency investors, as things can change quickly and you need to be ready to act, adjusting your overall investment strategy as necessary.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
Conclusion - Trade Cryptocurrencies During Inflation
As inflation continues to edge up, more and more investors are looking for assets that will offer better returns on their capital. There’s no denying that certain cryptocurrencies have the potential to offer significant returns that far outstrip those of cash savings accounts or even traditional assets like stocks and bonds.
There is, of course, substantial risk involved in cryptocurrency investment, which is why it can’t really be considered a ‘safe haven’ in the same vein as gold or certain other commodities. But for investors looking to take on said risk, the crypto market growth certainly has the potential to outstrip inflation.
Of course, it’s important that investors choose the right coins, as some offer more potential than others and even more stability - comparatively speaking. The suggestions we’ve made above are all good options for building any crypto investment portfolio but are particularly suitable if you are looking to trade cryptocurrencies during inflation.
eToro – Best Platform To Trade Cryptocurrencies
Open an account with eToro, deposit some funds with USD, and finally – buy cryptocurrencies for just $10.
Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
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FAQs Trade Cryptocurrencies During Inflation
Can cryptocurrencies hedge against inflation?
As inflation continues to soar, many investors are seeking investments that could offer more significant returns - even if it means taking on a little more risk. Cryptocurrencies more than fit the bill for this, as they have been known to offer four-digit growth in some cases. Whether they outstrip inflation in the coming years remains to be seen, but it could be argued that they have a better shot than most traditional assets.
How do I beat inflation with cryptocurrency?
To beat inflation, you need to find an investment that offers returns at a higher rate. Given that UK inflation has hit 10%, this is no easy feat. Investors will need to identify the cryptocurrencies that have significant growth potential. In addition, they will need to choose coins that are likely to hold onto any gains - there’s little point in beating inflation if you then lose your gains when a coin’s price crashes.
Are cryptocurrencies better than stocks?
Some stocks offer a more stable investment than cryptocurrencies, but more often than not they will offer smaller returns. Alternatively, there are some riskier stocks out there that have the potential to offer bigger returns, but could also crash hard. Whilst the cryptocurrency market is highly volatile, the top tokens in the space tend to recover from market downturns and they often move incongruously with the stock market, which makes them a great complement to stocks in a diverse investment portfolio.
How do I buy crypto?
If you’re looking to start a cryptocurrency investment portfolio, then the good news is that buying coins is relatively easy. All you need to do is open an account with a broker or exchange, like eToro. You’ll then be able to buy and sell cryptocurrency at the touch of a button, as well as manage your portfolio moving forward.
Is Bitcoin a better investment than property?
It's probably fair to say that many mainstream investors would still pick property over Bitcoin when it comes to long-term investments. However, whilst real estate can offer some impressive returns over time, the main drawback is that property is a fairly illiquid asset, whereas Bitcoin can be bought and sold in a matter of minutes. Bitcoin’s volatility also means it can yield much higher returns in a shorter space of time. Choosing between property and Bitcoin investment will largely come down to your overall strategy and appetite for risk.