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Gold, Bitcoin or DeFi: How can investors protect themselves from inflation?

9 min reading

It has reached a point where the investors have to find a solution for inflation and protect themselves from it.


Bitcoin (BTC) was created after the 2008 financial crisis and aims to solve the problems created by loose monetary policy. The creator of the cryptocurrency, Satoshi Nakamoto, said in late 2008 that the supply of cryptocurrencies would increase "by the planned amount", which "does not necessarily lead to inflation". The inflation rate of the cryptocurrency is fixed and its circulation is limited to 21 million coins, which are expected to be mined by 2140. At that time, the BTC inflation rate will drop to zero. In contrast, fiat currency does not have a limited supply and can be printed to adjust monetary policy.

Expansive monetary policy, as practiced by most countries in the world in recent years, aims to expand the money supply by lowering interest rates and overseeing the central bank for quantitative easing. It has long been assumed that this expansionary monetary policy leads to higher inflation, defined as the devaluation of current assets as prices of goods and services rise. In November, inflation hit a 30-year high in the United States, while euro area inflation hit its highest level in 25 years of data collection.

Chris Klein, chief operating officer and co-founder of cryptocurrency platform Bitcoin IRA, said inflation is not temporary and is forcing people to "find alternatives to protect their assets." Klein notes that while gold and real estate were strong choices in the past, real estate prices are now "off the charts" while gold is "inaccessible to the average American." Bitcoin, he added, is now part of the “inflation hedge mix” because its supply cannot be manipulated in the same way as the supply of fiat currency.  Martha Reyes, head of research at cryptocurrency exchange Bequant, said the market has responded quickly to the latest inflation data by announcing the potential for a central bank rate hike. According to Reyes, "the main reason for these high inflation rates is the surge in the money supply as the pandemic creates trillions of dollars of new money."

Historically, gold was used as a protection against inflation. Bitcoin and other cryptocurrencies are often referred to as “Gold 2.0” because of the property that they can turn them into digital versions of the precious metal.

Crypto as a solution to inflation

Cryptocurrencies are known for their high volatility, with failures of up to 50% in a short period of time even with cryptocurrencies with blue chips. This type of volatility has led many to question whether BTC and other cryptocurrencies can be a viable inflation hedge. In a statement to clients, strategists at Wall Street banking giant JPMorgan suggested that an allocation of 1% of the portfolio to Bitcoin could serve as a hedge against fluctuations in traditional asset classes. Billionaire investor Carl Aikan also approves of BTC as a hedge against inflation.

Adrian Collodi, founder of the no-custodial decentralized exchange Domination Finance, reiterated Klein's opinion that Bitcoin is the solution to inflation, but noted that there are other ways to hedge against inflation in the cryptocurrency space. Kolodi cites the decentralized financial sector (DeFi) as a viable alternative. He suggested that by using stable coins – cryptocurrencies with price control mechanisms – and decentralized applications (DApps), investors could “stay ahead of inflation” while fighting “cash position risk”. All they have to do is find a way to earn interest on their stablecoin that will be above the annual inflation rate. Kolod said:

“The best way to look at it is that crypto gives you the flexibility to control your finances in a variety of ways, rather than being under the control of the federal government. Reyes found that Bitcoin is "more attractive as a means of storing value than other assets such as goods," because increased demand can only be met by rising prices rather than additional production. The head of research at the exchange added that cryptocurrencies are in an “early introduction phase”, meaning that there is no constant correlation with other assets and their appreciation has to do with halving the cycle and growth of the network.”

As such, Bitcoin, he added, is more resilient to an economic downturn, although a massive sell-off in the market is likely to be affected initially as some investors shrink. Earlier this month, Bitcoin appeared to show its potential as an inflation hedge when it hit a new all-time high in Turkey as the country's fiat currency, the lira, was in free fall. Others say that Turks would be better off investing in gold.

Also read: Blockchains need to switch to standards for interoperable asset transfer

Utility and Freedom or Inheritance?

Bitcoin has clearly outperformed gold so far this year, as it has risen 94% since early January. Gold, on the other hand, lost more than 8% in the same period, meaning that investors who bet on the precious metal to hedge against inflation so far have failed.

In the short term, the precious metal in Turkey is doing exactly what it is supposed to do: protecting people's purchasing power by holding back its value if the pound falls. In the last 30 days, it has even surpassed BTC in pounds. The downside is clear that BTC is a much better bet and so far this year it's up 270% against fiat currencies, compared to 70% for gold. Data suggests that investors should only bet better on gold if the crisis escalates, but in the long run, BTC will be the better choice.

When asked whether investors should choose Bitcoin or gold as an inflation hedge, Collodi argued that “Bitcoin and the crypto standard” is a better alternative to fiat currencies or the gold standard. This, he says, allows crypto and DeFi structures to be as strong as they are, as investors "don't have to worry about political figures" who can "beat" their money's worth by "simply crippling the system". . Although he sees gold as a suitable protection against inflation, for him BTC is the "obvious choice:"

“Investors who want to decide whether to join BTC or gold for inflation protection should ask themselves whether they want utility and freedom with their protection or their hereditary assets. Karan Sud, CEO and CEO of Cboe Vest, a wealth management partner of Cboe Global Markets, said that it's worth noting that Bitcoin's relatively young history "has gone both ways in the past." Inflation "has been up and down at the same time."

The court added that Bitcoin's inherent instability could potentially exacerbate this move. For example, he said that Bitcoin "could also fall sharply if the current inflation rate is found to be temporary and drop from its highs, which could expose investors to potentially significant losses". As a workaround, Sood suggested that investors looking to use BTC to hedge against inflation "could benefit from access to bitcoin exposure through strategies aimed at self-managing bitcoin volatility". Yuri Kovalev, CEO and founder of crypto trading platform Zenfuse, said that while the pound's free fall could mean betting on gold is a good move, it's not for US investors: Gold has underperformed this year, down 8.6 percent against the dollar, while the United States' CPI is up 6.2 percent. Gold has let investors bet, while BTC is down 92 year-to-date up 0.3%, which rewards those who trust it as a hedge.

Reyes admits that while Bitcoin offers better returns as measured by the Sharpe ratio, investors "want gold in their portfolios for diversification purposes, although it hasn't done well this year." A diversified portfolio can be a smarter way to hedge against inflation, at least for more conservative investors, as it is not yet clear how Bitcoin price will perform if inflation continues to rise. Blurred truth. It is not clear whether Bitcoin and cryptocurrencies in general offer a better solution for the current financial system. For Steven Stoneberg, CEO of Bittrex Global Cryptocurrency Exchange, "a balanced combination of the two systems is what we should strive for." Steinberg said:

“Both models have their merits, but Bitcoin and the entire digital asset economy must be further integrated into traditional financial systems if we are to reach the worlds unbanked. Caleb Silver, editor-in-chief of financial information portal Investopedia, said that "the truth lies in the dark" when it comes to Bitcoin, which is used as a hedge against inflation. According to silver, Bitcoin is a relatively young asset compared to traditional inflation hedges such as gold or the Japanese yen, and despite having traits that are "an important component of its perception of it as an inflation hedge", wild price fluctuations affect its reliability.

According to him, investors should be aware of the volatility of the past decade: “It has entered 20 different bear markets in the last decade and has seen a decline of 20% or more in nearly 80% of its history. Pre-pandemic consumer prices have remained largely unchanged over the past decade. Silver added that Bitcoin is a “highly speculative asset” even though institutional investors have been accepting it for more than two years. He concludes by saying that Bitcoin is not seen by most market participants as a storehouse of wealth "which undermines its credibility as an inflation hedge".

There are many instruments available for investors to hedge against inflation, not just Bitcoin. Only time will tell what works and what doesn't, so for some investors, a diversified portfolio might be the answer. Some of the tools at their disposal, according to our experts, include the BTC, Gold and even DeFi protocols that will help them anticipate inflation.

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