Gold or cryptocurrencies: What is the best option to hedge against inflation?

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The world is in a time of high uncertainty. Despite the fact that most countries anticipated that 2022 would be a year of recovery and lower inflation, all expectations fell with the emergence of a new variant of coronavirus, Ómicron. Analysts are beginning to see decentralized finance as an option for the future.

The world is in a time of high uncertainty. Despite the fact that most countries anticipated that 2022 would be a year of recovery and lower inflation, all expectations fell with the emergence of a new variant of coronavirus, Ómicron. Faced with this scenario, doubts began to arise among investors to try to cover their savings and the doubts were placed in two alternatives: Gold or Bitcoin?

Bitcoin (BTC) was created in the wake of the 2008 financial crisis and was planned to solve the problems created by lax monetary policies. The creator of the cryptocurrency, Satoshi Nakamoto, said in late 2008 that the supply of the cryptocurrency increases “by a planned amount” that “does not necessarily result in inflation.” The cryptocurrency’s inflation rate has been fixed and its circulating supply is capped at 21 million coins, which are expected to be fully mined by 2140. By then, BTC’s inflation rate will drop to zero. In contrast, fiat currencies do not have a finite supply and can be printed to adjust monetary policy.

An expansionary monetary policy, like the one that most countries around the world have followed in recent years, aims to expand the money supply by lowering interest rates and making central banks engage in quantitative easing.

This expansionary monetary policy has long been believed to lead to higher inflation, defined as the devaluation of a means of payment amid the rising cost of goods and services. In November, inflation in the United States rose to its highest level in 30 years.

The cryptocurrency specialist page, Cointelegraph, consulted several specialists on the subject who provided what the best possibilities are. Chris Kline, chief operating officer and co-founder of crypto retirement platform Bitcoin IRA, said inflation is not transitory and is forcing people to “find an alternative to protect their assets.”

Kline said that while gold and real estate were strong choices in the past, prices of real estate are now “off the charts” while gold is “inaccessible”. Bitcoin, he added, is now part of the “inflation hedge mix” because its supply cannot be manipulated in the same way as the supply of fiat currencies.

Martha Reyes, head of research at cryptocurrency exchange Bequant, noted that the market reacted quickly to the latest inflation figures by assessing potential interest rate hikes from central banks. For Reyes, the “fundamental cause of these high inflation readings is a large increase in the money supply, since trillions of dollars of new money were created due to the pandemic.”

Historically, gold has been used as a hedge against inflation. Bitcoin and other cryptocurrencies have often been referred to as “gold 2.0” because they possess properties that could turn them into a digital version of the precious metal.

Bitcoin as a hedge?

Cryptocurrencies are known for their strong volatility, with drops of up to 50% in short periods of time, even in the case of top-notch crypto assets. This type of volatility has caused many to question whether BTC and other cryptocurrencies could be a viable hedge against inflation.

In a note sent to clients, strategists at Wall Street banking giant JP Morgan have suggested that an allocation of 1% of the portfolio to Bitcoin could serve as a hedge against fluctuations in traditional asset classes. Billionaire investor Carl Icahn has also backed BTC as a hedge against inflation.

Adrian Kolody, founder of the decentralized non-custodial exchange Domination Finance, echoed Kline’s view of Bitcoin as a solution to inflation but noted that in the cryptocurrency space there are other ways to hedge against inflation.

This is how Kolody pointed to the decentralized finance (DeFi) sector as a viable alternative. He suggested that by using stablecoins, cryptocurrencies with a price control mechanism, and decentralized applications (DApps), investors could “beat inflation” while resisting the “risks of a spot position.” To do this, they would simply have to find a way to earn interest on their stablecoins that were above annual inflation rates.

Reyes noted that Bitcoin is “more attractive as a store of value than other assets such as commodities,” as growing demand can only be met by rising prices and not by additional production. The exchange’s head of research added that cryptocurrencies are in an “early stage of adoption,” meaning they “don’t tend to have consistent correlations with other assets, and their price appreciation should come from halving cycles. and the growth of the network.”

Bitcoin, he added, is, as such, more “resilient to economic downturns, although in a strong market sell-off, it would likely be hit initially as well as some investors cut across the board.”

Earlier this month, Bitcoin demonstrated its potential as a hedge against inflation hit a new all-time high in Turkey as the lira continued to decline. Others argue that the Turks would have benefited from investing in gold.

Bitcoin has vastly outperformed gold so far this year, as it is up 94% since the beginning of January. Gold, by comparison, has fallen more than 8% over the same period, which means it has so far failed investors who gambled on the precious metal to hedge against inflation.

In the short term in Turkey, the precious metal did exactly what it had to do: It protected the purchasing power of citizens by maintaining its value as the lira sank. In the last 30 days, it even outperformed BTC in lira terms.

If the picture is enlarged, it becomes clear that BTC was a much better bet, as it is up 270% against fiat currency so far this year, compared to 70% for gold. The data shows that investors would only have bet better on gold when the crisis intensified, but that in the long run, BTC would have been a better bet.

As for whether investors should choose Bitcoin or gold as a hedge against inflation, Kolody argued that a “Bitcoin and cryptocurrency standard” is a better alternative than a fiat currency or the gold standard, adding that the fact that not having trust or permission helps cryptocurrencies stand out.

This, he said, allows crypto and DeFi structures to be as powerful as they are since investors “don’t have to worry about a political figurehead” who can “nuclear” the value of their money “by simply strangling the system.” Although he considers gold to be an adequate hedge against inflation, for him, BTC is “the clear choice”.

To hedge against inflation, investors have a host of tools at their disposal, not just Bitcoin. Only time will tell what will and will not work, so a diversified portfolio may be the answer for some investors.