Inflation is a necessary evil. It’s a sign of a healthy economy, but it also reduces the purchasing power of cash and other fiat currencies. This is why experts on cryptocurrency asset management in the UK advise against saving money in cash. Instead, they are turning to Bitcoin and other cryptos to hedge against inflation.
How Do Investors Hedge Against Inflation?
A hedge against inflation is an investment or asset that price fluctuations can’t affect. Its value either stays the same or increases over time.
“Hard assets” is another name for investments that are good hedges against inflation. Their hallmarks include:
- Durability; or the asset should build up demand over time
- Accessibility; or the market should value and acknowledge the asset
- Scarcity; because a limited supply drives up demand and raises prices
Great hedges against inflation include store value assets, such as bonds, stocks, precious metals, and crypto tokens. Cryptocurrency websites report that Bitcoin is carving out its place among inflation hedges.
What’s So Bad About Gold and Other Investment Go-Tos?
Gold has been the world’s go-to hedge against inflation. But reports show that it has yet to provide positive returns during consistent inflation periods.
In fact, the precious metal entered 2022 with a -5% loss. As it stands, the only trend that gold can hedge against is the printing of too much money worldwide.
Real estate is another safe haven for investors. Properties benefit from inflation’s effect on debt. As a house’s price increases over the years, it reduces the loan-to-value of mortgage debts.
What makes this setup shaky is that there are a lot of factors that can affect it, such as the limited development projects. This can contribute to an increase in property values in rental rates.
In short, most of the traditional go-tos for people aiming to beat inflation are no longer as secure as they once were.
The Problem With Fiat Currencies
If inflation is constantly shaking up asset investments, why not just save up fiat currencies to build wealth?
The answer boils down to this: inflation works to boost spending.
So any money kept at hand or in a bank account will continuously lose value until it’s spent or invested to earn returns.
For instance, for much of the early 1900s, the Pound to Dollar rate stayed at £1 for every $5. However, at the moment, the exchange rate is £1 for every $1.30. These figures will only continue changing in the coming years.
Crypto Offers Unparalleled Protection Against Inflation
Cryptocurrencies have limited supplies. And in recent years, their prices rose faster than most financial instruments. Bitcoin, in particular, has been surging. It’s no wonder it remains a focus in cryptocurrency asset management in the UK.
People who own Bitcoin tokens have indeed earned big in the past decade. The crypto’s “halving” and other in-built protocols also did wonders for its value.
That means, investing in Bitcoin could give way to incredible returns that can balance out losses from other investments.
But how exactly does it compare to traditional hedges like gold?
Well, when Bitcoin went over $50,000 for the first time in a month in 2021, gold was down 7.3% in the same period. This became a common trend in the following months.
Which Crypto Is the Best Hedge Against Inflation?
The safest legacy cryptocurrencies are Bitcoin and Ether. They operate on blockchain-based platforms. These are open to everyone thanks to the technology’s decentralised global ledger.
While Bitcoin and Ethereum are volatile, both have consistently produced year-on-year gains.
Bitcoin is trading at $40,054.00 as of mid-April, which is slightly lower than its April 2021 price. Despite that, it remains a great longer-term asset to hedge investment even with inflation at 8%.
Meanwhile, as of mid-April, Ethereum is trading at $2,762.99. It’s higher than its trading price for the same month in 2021.
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