The world is becoming more and more volatile and insecure. The claim that “inflation is a silent thief” becomes less relevant. In 2021, inflation has become a loud and unscrupulous thief. Inflation is now at its highest level in 40 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 US and Europe has already become a real threat to tens of thousands of private investors around the world.
At a meeting of the Federal Open Market Committee (FOMC) last week, Federal Reserve Chairman Jerome Powell said he would recommend a cautious rate hike. At the same time, Powell said that he expects from the crisis in Eastern Europe not only an increase in the prices of oil, gas and other raw materials, but also an increase in inflation. Powell also reiterated in unequivocal terms his willingness to raise the price as high as necessary, even if it leads to a recession.
Cryptography to the rescue
Many investors are looking for ways to protect their savings against inflation using cryptocurrencies.
Chad Stinglas, Head of Trading at CrossTower, is skeptical of cryptocurrencies as a defensive resource. Steinglass commented to Cointelegraph:
“It is important to remember that cryptocurrency is still a modern asset and is traded as a speculative asset, not a defensive one.”
In fact, cryptocurrencies differ from fiat currencies in their volatility. Even the most stable cryptocurrencies, bitcoin (BTC) and ether (ETH), which are of great interest to institutional investors, can rise and fall by tens of percent during the day.
Of course, with more and more uses for Bitcoin every day, it already serves as the base layer for an emerging alternative financial system. In the long run, this trend will develop, which will not only lead to an increase in the price of bitcoin, but also to a gradual decline in volatility.
To protect money from inflation, investors buy gold, cash or real estate. Speaking to Cointelegraph, Paolo Arduino, CTO of the Bitfinex cryptocurrency exchange, compared bitcoin to gold:
Cryptocurrency and Bitcoin in particular have unique properties and are a form of digital gold. It has been particularly successful when money is cut through central bank stimulus tactics. This is, of course, one of the original intentions of Bitcoin, to protect people from this very phenomenon. ”
Jeff Mei, Director of Global Strategy for the digital asset platform Huobi Global, also shares this view. May said that Bitcoin is a good hedge against inflation because after all is extracted, only 21 million bitcoins will be available.
Derivatives or not
Investors often use derivatives in traditional financial markets to protect savings against inflation. Rachel Lane, co-founder and CEO of the trading platform SynFutures, said that by using derivatives such as Bitcoin futures, investors can access BTC with much less capital and limit potential losses.
However, Ardoino does not recommend that investors use crypto derivatives for this purpose. He believes that direct exposure to Bitcoin, which he calls “the king of cryptocurrencies”, is more desirable.
Apart from Bitcoin, Ether has been listed by May as one of the most stable digital assets. He convinced the Cointelegraph that Ethereum competitors such as Polkadot (DOT), Terra (LUNA) and Solana (SOL) could also be considered a value store.
Lin noted that if investors are just looking for a way to earn a steady income, they can convert their money into cryptocurrencies and deposit them on some of the largest centralized financial platforms (CeFi) or leading decentralized financial protocols (DeFi). This will probably give you a much higher return than depositing money in the bank.
Steinglass is still skeptical about comparing cryptocurrencies with the dollar in the current situation where the conflict in Eastern Europe has seen the US dollar strengthen against many other currencies while people fight for stability. At present, the demand for dollars has surpassed the fear of inflation. Stone glass added:
“On the one hand, cryptocurrencies are a component of an alternative monetary system and a much-needed stockpile, and on the other hand, they remain a risky resource at a time when investors around the world are reducing risk.”
Is gold the answer?
None of the experts interviewed by Cointelegraph mentioned a gold-backed stablecoin like PAX Gold (PAXG) as their preferred defensive asset. Historically, gold has been a traditional tool used to protect capital in times of financial turmoil. The price of gold is still rising over time.