As the value of traditional assets is falling, investors turn to cryptocurrencies as a hedge against inflation. Some crypto assets are booming since investors prefer them over precious metals.
Amid the current global economic crisis, the solution that many governments seek is to print large amounts of cash. That usually leads to inflation, so investors lock their capital in stable assets in the long term. Traditionally those assets have been gold, silver, and copper, but cryptocurrencies have joined them.
In that sense, the US Federal Reserve (Fed) solves the crisis by printing large amounts of money. For that reason, the US dollar has already lost 5% of its value, which is just the beginning. Additionally, Goldman Sachs analysts predicted that the US fiat currency could lose up to 20% in the next few years.
Another threat to investors, in addition to that devaluation, is deflation. The US dollar value of assets is falling, which is why they have turned to cryptocurrencies as a hedge. For that reason, Bitcoin has maintained its value despite the global economic situation.
Inflation and Deflation Have Made Cryptocurrencies a Hedge
Cryptocurrency investors are used to interacting with the daily movements of the market. However, it can be easy for them to forget about fundamentals, like inflation, that drive the global economy.
Inflation occurs essentially due to a general decline in the purchasing power of fiat money. That is due to foreign investors exiting a particular currency or even investors attacking a currency. However, most of the time inflation results from an increase in the supply of money.
On the contrary, deflation is the price decrease when the fiat currency increases in value concerning the different goods and services. There may be various causes, but the most likely are tightly controlled fiscal policies, insufficient demand, and excess supply.
The COVID-19 Pandemic Has Contributed to Investing in Cryptocurrencies
Inflation can only occur with fiat currencies as they do not rely on the market value of a tangible asset. They depend on confidence in the growth of the gross domestic product of a country’s economy.
Having a fiat currency provides governments with the freedom to print money and thus supposedly control inflation. However, a low level of confidence in the government can cause government spending programs to put inflation out of control. In the 1970s, investors looked for gold as a hedge against the rapid inflation of the US dollar.
Similarly, the global COVID-19 pandemic has led to massively inflationary monetary policy. In addition, there is a considerable expansion of the money supply, while prices in crucial sectors such as food continue to rise. That is due to the high fluctuations of the stock caused by the quarantines in different countries.
For that reason, there is a boom of some cryptocurrencies as billionaire investors currently prefer Bitcoin to gold. That provides a sustainable foundation for cryptocurrencies to be a hedge against inflation today. The first cryptocurrency has proved its ability to recover from sharp drops in its price since its inception.
By Alexander Salazar