Cryptocurrency and inflation are causing investor concerns but also are expected to rise in sync.
As a result, when inflation increases, cryptocurrency is supposed to gain value, too. For that reason, cryptocurrency is seen by certain investors as a hedge, or potential protection of the buying power of an investor’s money.
Yet, as inflation has increased at a very fast pace, crypto has been so volatile that its correlation with rising prices has come into question. Cryptocurrency has not been living up to expectations lately by sliding as inflation is climbing.
Many critics argue that the main reason for the increased funds in the crypto market is the overall price appreciation of cryptocurrencies over time. However, when Bitcoin incurs a drastic dip, many investors flock back to gold, viewing cryptocurrency as an unproven sector which hasn’t established itself as a stable asset class, nor a safe haven store of value.
Cryptocurrency and Inflation: Bitcoin Bows Rather than Rises
Big swings in crypto prices show a lack of consistency that is required to outpace inflation. For example, Bitcoin’s value significantly decreased in 2021 at the same time consumer prices began increasing.
Any asset used as a store of value and a hedge against inflation requires a high level of stability and trust. Gold has established itself in this realm throughout history. In comparison, cryptocurrencies have too much short-term volatility to give investors the same confidence they have in gold.
Cryptocurrency and Inflation: Is this Time Different?
Unlike other instances of inflation, rising prices has not dampened the growth much, thereby benefiting the U.S. dollar. As of now, investors may have more confidence in the U.S. dollar value versus its hedge investments like cryptocurrencies.
Much of the recent inflation has been from pandemic related quirks, like the rise in commodity prices, supply chain disruptions and labor force changes. Classic and better understood inflation hedges like gold or commodities have not worked well in this environment either. Usually when inflation increases, the value of hedge investments rise as well. However, the current climate has not produced those results.
A Stablecoin Alternative
If an investor is hesitant about crypto’s volatile nature, he or she can consider using stablecoins. Stablecoins are cryptocurrencies whose value is pegged to reserve assets like the U.S. dollar and do not fluctuate in value like other cryptos.
Stablecoins like BUSD, USDT, USDC and TUSD offer investors a more convenient way to participate in trading Forex and different fiat currencies to combat inflation. Unlike traditional currency markets, stablecoins can be purchased 1:1 with the U.S. dollar.
During hyperinflationary times, economies often must deal with a volatile fiat currency. Stablecoins are a great alternative as more merchants and stores are starting to accept crypto as a payment method. Fiat-backed stablecoins are becoming increasingly popular in unstable economic markets.
The Bottom Line
Although inflation remained stable during the last year as the Coronavirus pandemic kept businesses grounded, it has risen substantially recently and it is expected to continue in that direction.
Some investors are already using Bitcoin and other cryptocurrencies as a hedge against inflation. This could prove to be a savvy move, but that remains to be seen for now because it is such a youthful investment asset class. Its risk is less understood and more difficult to compare with other securities.
Simply put, crypto’s past is too brief to predict its future performance, especially during today’s unique market conditions.
For now, cryptocurrency remains an unpredictable investment opportunity. If you own Bitcoin or another cryptocurrency as part of a diversified investment strategy, set specific performance goals. This will guide your actions when it crosses a specific price. That way, you’ll avoid emotional investing.
Adam Johnson is an editorial intern who writes for www.stockinvestor.com and www.dividendinvestor.com.