The world is becoming increasingly volatile and uncertain. The claim that “inflation is the silent thief” loses its relevance. In 2021, inflation has turned into a rather loud and cheeky thief. However, inflation is at its highest for forty years, already exceeding 5% in Europe and reaching 7.5% in the United States. The conflict between Russia and Ukraine affects futures contracts for gold, wheat, oil, palladium and other commodities. High inflation in the United States and Europe has already become a real threat to the capital of tens of thousands of private investors around the world.
At the Federal Open Market Committee (FOMC) meeting last week, Federal Reserve Chairman Jerome Powell said he would recommend a cautious hike in interest rates. At the same time, Powell mentioned that he expects the crisis in Eastern Europe to lead not only to higher prices for oil, gas and other raw materials, but also to higher l ‘inflation. Powell also explicitly reaffirmed his determination to raise the rate as high as necessary, even if it would cause a recession.
Crypto to the rescue
Many investors are looking for ways to protect their savings from inflation by using cryptocurrencies.
Chad Steinglass, head of trading at CrossTower, is skeptical of cryptocurrencies as a defensive asset. Steinglass commented to Cointelegraph:
“It’s important to remember that crypto is still a young asset and trades more like a speculative asset than a defensive one.”
This is because cryptocurrencies differ from fiat currencies in their volatility. Even the most stable cryptocurrencies, Bitcoin (BTC) and Ether (ETH), which are of the greatest interest to institutional investors, can go up and down by tens of percent in a day.
Of course, there are more use cases for Bitcoin every day, and it is already functioning as a base layer for the emerging alternative financial system. In the longer term, this trend will develop, which will not only increase the price of Bitcoin, but also cause its volatility to gradually decrease.
To protect money from inflation, investors buy gold, cash or real estate. Speaking to Cointelegraph, Paolo Ardoino, Chief Technology Officer at Bitfinex, compared Bitcoin to gold:
“Crypto and Bitcoin in particular have unique properties and are a form of digital gold. In particular, it has proven to perform well when the currency is downgraded by central bank stimulus methods. This, of course, is one of Bitcoin’s original intentions – to protect people from this very phenomenon.
Jeff Mei, director of global strategy at digital asset platform Huobi Global, also agrees. Mei said Bitcoin is a great inflation hedge because there are only 21 million Bitcoin available once they are all mined.
Derivatives or not
Investors often use derivatives in traditional financial markets to protect their savings from inflation. Rachel Lin, co-founder and managing director of trading platform SynFutures, said that by using derivatives such as Bitcoin futures, investors could gain exposure to BTC with much less capital and limit potential losses. .
But, Ardoino does not recommend investors to use crypto derivatives for this purpose. He thinks direct exposure to Bitcoin, which he calls “the king of crypto,” is more advisable.
In addition to Bitcoin, Mei names Ether as one of the most stable digital assets. He told Cointelegraph that Ethereum competitors such as Polkadot (DOT), Terra (LUNA), and Solana (SOL) could also be seen as a store of value.
Lin pointed out that if investors were just looking for a way to earn fixed income, they could convert their fiat to crypto and deposit it on some of the biggest centralized finance (CeFi) platforms or top-notch decentralized finance protocols. (Challenge). Potentially, this provides a much higher return than depositing money in a bank.
Steinglass remains skeptical about the comparison of cryptocurrencies to the dollar in the current situation, now that the conflict in Eastern Europe has driven the value of the USD up against many other currencies as people fight for stability. So far, the demand for dollars has outpaced the fear of inflation. Steinglass added:
“On the one hand, cryptocurrencies are a badly needed element of an alternative monetary system and store of value and on the other, they remain a risky asset at a time when global investors around the world have reduced risk.”
Is gold the answer?
None of the experts interviewed by Cointelegraph mentioned gold-backed stablecoins such as PAX Gold (PAXG) as their favorite defensive asset. Historically, however, gold has been a traditional tool used to protect capital during times of financial turmoil. The price of gold constantly increases over time. Throughout 2021, the price of gold has been between $1,700 and $1,950 per ounce. It has risen further to reach $2,050 per ounce in 2022.
Institutional investors have shown increased interest in gold-backed stablecoins, but the same cannot be said for the younger generation of retail investors. Perhaps the main problem with gold-backed stablecoins as inflation protection is not technology but ideology. For many cryptocurrencies, fiat currencies and assets like gold represent old values.
It is clear that in 2022, inflation will remain a threat to investors’ capital, and the crypto industry has yet to find its answer to the question of how to fight this “silent thief”.