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Given the current state of the world, it must be said that the future is uncertain and a high degree of volatility is present. Take inflation. Inflation is presently at the highest levels seen in 40 years with rates in Europe exceeding 5% and rates in the United States eclipsing 7.48%. Couple this with the affects on futures in gold, wheat, oil and other commodities occasioned by the Russian-Ukraine conflict and catastrophe looms.
Federal Reserve Chair Jerome Powell will recommend a ‘cautious hike in interest rates’. However, Powell reaffirmed his position to raise rates as high as necessary to combat inflation - even if the same brings on recession. While making these comments he made mention of his opinion that the Russian-Ukraine conflict would not only bring on higher oil, gas and other commodities prices, it would boost the overall inflation numbers as well. [See, Powell, J. Semiannual Monetary Policy Report to the Congress. (Accessed March 14, 2022)].
With the situation worsening, the already high inflation rates seen in the US and Europe are becoming a tangible threat to the capital held by untold numbers of worldwide private investors. So the question becomes: which way do these private investors turn to protect their investments and savings from the mounting inflation?
Is Bitcoin the New Gold?
Head of Trading at CrossTower, Chad Steinglass, expressed his doubt that cryptocurrencies could be utilized as an effective defensive asset against inflation. He commented: “It’s important to remember that crypto is still a young asset and trades more like a speculative asset than a defensive one” [The Bharat Express News. Cryptocurrencies against the “silent thief”. Can Bitcoin protect capital against inflation? (Accessed March 14, 2022).
Bitcoin (BTC) and Ethereum (ETH), which are among the most stable of the non-stablecoin cryptocurrencies, as well as being favored by most institutional investors, may rise and fall by multiple percentage points on a daily basis. As such as relates to volatility, their differences from fiat is readily clear.
Nonetheless, the number of use cases for Bitcoin is growing and it has cemented its position as the base layer for the emerging alternative financial ecosystem. To follow this to the long run, the price of Bitcoin should increase while its volatility decreases.
At present it is the normal course for investors to move funds into gold, cash or real estate as a defense against inflation. Comparing Bitcoin to Gold, Chief Technology Officer at Bitfinex, Paolo Ardoino, stated:
Crypto and Bitcoin, in particular, have unique properties and are a form of digital gold. In particular, it has shown to perform well when money is being debased by central bank stimulus methods. This, of course, is one of the original intentions of Bitcoin — to protect people from this very phenomenon.
Director of Global Strategy at Huobi Global, agreed with Ardoino stating that Bitcoin is a great hedge against inflation as there are only 21 million Bitcoin available once they are all mined [Id].
To Use Derivatives or Not to Use Derivatives? That is the Question
Within traditional financial markets, derivatives are used by investors to protect their savings from the effects of inflation. Co-founder and CEO of SynFutures, Rachel Lin maintains that through the use of derivatives (such as longing Bitcoin futures) investors can gain exposure to Bitcoin using much less capital and limiting their potential for loss.
Ardoino does not agree and does not believe that investors should use the available derivatives in this fashion. It is his belief that direct exposure to BTC is preferable. Mei takes this one step further stating that it is Ethereum that is the most stable (least volatile) cryptocurrency. In Mei’s opinion, he believes that certain ETH competitors (Polkadot, Terra and Solana) could be looked at as stores of value as well.
According to Lin, if investors are simply looking for a fixed income in inflationary times, they should merely convert their fiat to crypto and deposit the same on the larger CeFi platforms or DeFi platforms. This action should yield a much higher return as opposed to depositing the fiat in a Bank.
Steinglass, however, expresses skepticism in comparing crypto to the Dollar. His reason - people are now dashing for stability in light of the situation in Eastern Europe which has caused a spike in the value of the US Dollar as compared to other fiat currencies. Currently, the demand for Dollars far exceeds inflationary fears. He added: “On one side, cryptocurrencies are an element of an alternative money system and store of value badly needed and on the other side, they remain a risk asset in a time when investors worldwide have been reducing risk.” [Id].
So unfortunately, no clear answer on the use of cryptocurrency derivatives exists as a use case for defending against inflation.
Wait a Minute. What About Gold Backed Stablecoins?
From a sampling of experts in the field by Cointelegraph, no one mentioned gold backed stablecoins as an effective defensive asset to combat inflation. This is somewhat perplexing as historically investors have resorted to gold in times of financial trouble to protect their assets.
While there has been an increase in interest in gold backed stablecoins by institutional investors, there appears to be no interest exhibited by the up and coming younger generation of retail investors. It has been opined by some that this divergence is not reflective of technology, but is of ideology, as for most involved in cryptocurrencies, fiat currency and gold represent ‘old values’.
Final Thoughts
What is clear is that inflation is and will remain a threat to the capital of investors. However, the cryptocurrency industry, in its nascent state, has yet to provide a substantive tool to fight against the effects of said inflation. Time will tell if crypto can provide an effective defensive weapon against inflation.
