Don’t Fear Inflation - Learn How You Can Hedge Against Inflation with Crypto Interest Account
Inflation fears are at their all-time high in 2021, with many people expecting inflation to jump in the upcoming year. To protect savings from rising costs, people often start hedging against inflation. This refers to investing in asset classes that are expected to maintain or increase in valuation during inflation. People turn to inflation hedges to protect themselves from the rising prices in goods and services and maintain their purchasing power. This article will introduce inflation and the various reasons behind using cryptocurrencies as inflation hedges.
What is Inflation?
Inflation refers to the gradual increase of prices in goods and services, including daily necessities such as food, housing and transport. This leads to a decline in a consumer’s purchasing power and generally affects the economy of a country. Consumer Price Index (CPI) is often used to measure the average prices of a basket of goods and services that are commonly purchased by consumers. An example of inflation – Back in 2000, a cup of coffee cost $1, whereas now it costs $2.
Causes of Inflation
There are two main factors that cause the increase in prices for goods and services; demand-pull inflation and cost-push inflation.
Demand-pull inflation is when there is an increase in consumers’ demand for goods and services, but the supply remains the same. Reasons behind demand-pull inflation can include a growing economy, inflation expectation and oversupply of circulating money.
- Growing economy: When an economy is growing well, there are lower unemployment rates which increases consumers’ confidence in spending money. This can create an increased demand for goods and services.
- Inflation Expectation: When consumers anticipate an upcoming inflation, they may purchase more products now to save money before a price increase in future. This would, in turn, lead to demand-pull inflation.
- Oversupply of Circulating Money: When the government has debt, they may print too much money to pay them off. This can lead to an excess amount of money in circulation and erodes the real value of your money.
Cost-push inflation is when there is an increase in production costs, which pushes the costs of goods and services upwards. Reasons behind cost-push inflation can include increase of costs in raw materials and unexpected situations.
- Increase of Costs in Raw Materials: When costs in raw materials increase, it will increase the overall price of goods and services. For instance, oil is used in many activities in an economy like transportation and manufacturing plastics. If the prices of oil increase, it will be more expensive to make plastic, and a plastic manufacturer will pass on the extra costs to consumers by raising prices.
- Unexpected Situations: When unexpected situations like Covid-19 occur, it can lead to supply chain disruptions that increase the overall price of goods and services. Many countries have previously implemented lockdown or are still in lockdown, which disrupt many industries and push overall cost up.
Introducing Bitcoin: A Promising Inflation Hedge
In recent years, many people are turning their hard-earned cash into cryptocurrencies to protect themselves from inflation and a decline in purchasing power. Its huge potential to protect wealth is being realized by an increasing number of retail investors. Here are some reasons why people choose crypto over other inflation hedges:
To buy Bitcoin, you would only require an internet connection and a trusted exchange. This allows anyone to gain access to crypto conveniently as compared to purchasing physical gold. Although physical gold is historically recognized as an inflation hedge, there are not many uses for it and it is troublesome to ensure safe storage.
Unlike fiat currencies, there is no centralised authority governing and distributing it. There is a finite number of Bitcoin available as it is designed to only have $21 million in existence. Bitcoin halving occurs once every four years and rewards to Bitcoin miners would continuously halve till zero. The scarcity and scheduled supply of Bitcoin make it an asset class that provides certainty to investors.
Bitcoin does not succumb to wear and tear, and it is almost indestructible as compared to fiat currencies. There are possibilities where people may lose their Bitcoin by transferring to incorrect addresses, but that is easily avoidable by being cautious and sending to whitelisted addresses only. In addition, the overall demand for crypto is increasing long-term despite the temporary dips. This makes Bitcoin highly durable as it will continue holding value over time.
Stablecoins: Alternative to Bitcoin
As you may know, there are other popular cryptocurrencies on top of Bitcoin. Stablecoins is a type of crypto that has been gaining traction in recent years. With their value pegged to real-world assets, stablecoins are cryptocurrencies without volatility. Examples include Tether (USDT) and USD Coin (USDC), which are backed by the U.S. Dollar. Although they are pegged to a fiat currency, the U.S. Dollar is strong and stable and thus inflation resistant.
This makes stablecoins especially useful for countries like Argentina, which has been battling high inflation for years. The rate of inflation is not expected to slow down anytime soon and is forecasted to hit 48.3% in 2021. Growing adoption of DAI in Argentina proves that many believe stablecoins are an excellent refuge for inflation. You need not worry about your fiat currencies being affected by inflation or losing value.
Bonus Tip: Combat Inflation with Crypto Interest Account
Interest rates across global banks have plummeted due to a fall in consumer borrowing which makes keeping cash in a bank unattractive. There are no signs that this will change in the near future, and the popular alternative that people turn to are crypto interest accounts.
Holding your cryptocurrencies in a crypto interest account allows you to earn passive income on your Bitcoin and crypto. When you store your assets with crypto interest platforms, they act as custodians and lend out the assets to vigorously vetted institutions. Thus, being able to provide you with crypto interest rates that are significantly more attractive than traditional banks.
An example of a crypto and Bitcoin interest platform is Hodlnaut. With its leading APY market rates of up to 12.73% interest, you can maximize the productivity of your crypto while they sit idle and earn interest in your account. There are no lock-in periods or minimum deposits, allowing you the freedom to deposit and withdraw anytime.
Inflation is bound to happen in time to come and is unavoidable. The decision lies with us to take action and invest in inflation hedges to secure our future. We hope this article provided you with some insight on the benefits of crypto as an inflation hedge. To learn more about our helpful tips regarding crypto interest accounts, you can read our guide that introduces the basics of crypto lending. As always, remember to do your due diligence before embarking on your investment journey and diversify your assets to reduce risk.