How to Protect Your Crypto From Inflation

by Retirement Advisor | Nov 22, 2022 | Inflation Hedge

Cryptocurrencies were supposed to be safe havens in times of economic trouble and protection against the erosive effects of inflation. Unfortunately, Bitcoin and others have fallen significantly in value since the later part of 2021. Now it appears to be time to think about how to protect your crypto from inflation.

Inflation is going up. How is your crypto doing? The consumer price index, CPI, keeps going up. The U.S. Bureau of Labor Statistics reported on June 10, 2022 that in May of 2022 the Consumer Price Index for All Urban Consumers went up 1% in May as opposed to 0.3% in April. This seasonally adjusted increase included increases in food, shelter, and gasoline as the biggest offenders. Cryptocurrencies were supposed to be safe havens in times of economic trouble and protection against the erosive effects of inflation. Unfortunately, Bitcoin and others have fallen significantly in value since the later part of 2021. Now it appears to be time to think about how to protect your crypto from inflation.
Protecting Crypto from Inflation
Cryptocurrency promoters have routinely said that by investing in cryptocurrencies you will protect yourself against the steady loss in value of fiat currencies. The fact that Bitcoin has a limit to how many can be produced is a good argument for that cryptocurrency in an era when the US Federal Reserve can essentially print money like they did to bail out the economy during the Covid Crash. Unfortunately, Bitcoin lost more than half of its value in dollars from November 2021 to June 2022. With the Fed raising interest rates every month the dollar will likely keep gaining ground against other currencies and that includes cryptocurrencies. So, what do you do when you believe in crypto for the long term? There are two factors to consider, the long value of your cryptocurrency based on its fundamentals and where that cryptocurrency stands in relation to that fundamental value.
What Is the Fundamental or Intrinsic Value of a Cryptocurrency?
When we wrote about the future of cryptocurrency, we noted that after all is said and done each cryptocurrency will have a fundamental value that is not based on speculation or wishful thinking. It will be based on the practical use of that cryptocurrency. The Metaverse, decentralized finance, and NFTs all use and will use more cryptocurrencies as their means of financial transaction. A crypto that has function and thus value in that realm will have a fundamental value. That value will be much more inflation-proof! When an investor looks for investments that are resistant to inflation, they look for companies with pricing power and strong intrinsic value. That value is based on strong forward-looking earnings. A cryptocurrency like Ethereum that is closely tied to NFTs is a good example of one that will resist swings in inflation, once its inflated value due to speculation has been wrung out of it. Likewise, a cryptocurrency that is dominant in the DeFi space will likewise maintain its value when threatened by inflation.
Are Stablecoins Resistant to Inflation?
Stablecoins are pegged to another cryptocurrency, fiat currency, or commodity like gold. They may have tangible reserves backing their value or use an algorithm that seeks to manipulate trading to maintain a stable price. The idea is to avoid the wide fluctuations of a cryptocurrency like Bitcoin when using crypto to take out loans, do business, and pay bills. A stablecoin that is tied effectively to the US dollar will experience the same decline in purchasing power as the greenback. A stablecoin that is tied to gold will likely have some protection against inflation. The one caveat here is that when the US Federal Reserve raises interest rates to fight inflation the value of the dollar goes up against all commodities, including gold. Stablecoins are meant to be resistant to wild price fluctuations. They will need to have a basic, fundamental use and intrinsic value to be more resistant to inflation.
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