Bitcoin (BTC) is theoretically a potential inflation hedge, given its consistent supply and the fact that central banks can’t control it.
However, investors disagree, saying that the crypto market mirrors the stock market. Let’s examine why cryptocurrencies aren’t a hedge against inflation and what has to change to make them one.
Crypto is a hedge, but it has drawbacks.
Without a central bank, cryptocurrencies provide a unique option. Unreal things can’t be trusted. Its restricted supply increases its worth. People utilising proof-of-stake blockchains can access their funds at any moment while collecting staking rewards.
The annual percentage yield is connected to the chain’s economic activity via its treasury and staking reward distribution algorithms. These qualities solve inflation in traditional monetary systems, but the obstacles remain.
Let’s analyse why individuals buy and hold cryptocurrency. Most crypto holders see these technologies’ future potential, and a portion of their value is not yet existent. They’re risky. Bitcoin has gained decentralisation, but its high energy costs remain ignored, and most mining efforts are still in a dozen pools. Ethereum’s energy use and mining pool concentration follow suit. Ethereum’s blockchain has had $1.2 billion stolen this year.
DEXs aren’t as useful as centralised exchanges right now. Compared to a centralised exchange, Uniswap’s price is inefficient. A $1 million USDT-USDC deal on a decentralised exchange would cost approximately $30,000 in fees and slippage.
Technical issues and solutions
This is being addressed. Third-generation blockchains tackle energy and decentralisation. Improved privacy Crypto holders are accepting that their wallets will always be completely traceable, which may attract new users wary about blockchain’s hyper transparency. DEX’s inefficiency is being addressed by projects combining traditional finance logic with cryptocurrency’s natural features.
Crypto needs mass acceptance and integration to fight inflation. In a faltering ecosystem, crypto has potential worth. The crypto economy needs applications that entirely use decentralisation without compromising quality and experience for mass adoption. A payment system where each transaction costs $5 and value is routinely lost is unworkable.
Until top cryptocurrencies can be used for real-world payments and decentralised apps provide similar usefulness as centralised systems, crypto will remain a growth stock.
Lack of trust causes inflation; crypto still needs it.
Inflation isn’t created by printing additional money; an asset’s presence doesn’t inevitably lower its value. The quantity of U.S. dollars in circulation quadrupled between September and November 2008, while inflation fell.
Find more statistics at Statista
Public mistrust of the central monetary system drives inflation. This lack of trust, along with business price gouging, pandemic relief programs, and supply chain interruptions (exacerbated by the Ukraine war), precipitated the current catastrophe.
Supply alone is not a significant concern for a store of value currency. What’s stored isn’t always flowing. Gold exists in vast quantities as jewellery, bullion, etc., but in lower quantities on the commodities market. A market that considered all mined gold would have a different price. Because jewellery and bullion aren’t exchanged, they don’t affect supply and demand. Currency follows suit.
Wow 😓 Year on year inflation in Europe in July. pic.twitter.com/VGWQ1OQOcB
— Arnaud Bertrand (@RnaudBertrand) August 27, 2022
Inflation results from a lack of belief in an asset’s long-term worth. Most things in the world are finite. Thus, parties knowing of the increased supply but the unclear monetary policy would immediately raise prices.
Crypto isn’t an inflation hedge in the current climate
High volatility and market unpredictability make cryptocurrencies a poor inflation hedge. They often outperform the market in stable growth settings, and their tiny market capitalisation compared to fiat currencies helps them as growth stocks. Due to speculation and low transaction volumes, current usability solutions aren’t viable. Scammers keep derailing long-term solutions by bringing down financially unsound blockchains.
The more responsible and conscientious the crypto community is, the more sound protocols will benefit, and crypto will become an inflation hedge. Because cryptocurrencies follow growing stock trends, they are a solid inflation hedge during stable growth but fail during financial crises. As cryptocurrencies mature, they’ll become beneficial during downturns.
In times of market upheaval, it’s good to err on caution when investing in crypto, and relying only on crypto to hedge against inflation is dangerous. As blockchain technologies improve, cryptocurrencies will gain popularity and stability as inflation hedges.