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Cryptocurrency Versus Inflation:

A Viable Asset Worth Considering?

The looming threat of fiat inflation has finally arrived, at least for the US dollar. What strategies can investors use to protect their portfolios, and how does cryptocurrency factor in?

Faced with decreasing dollar power, investors are increasingly turning to so-called inflationary hedges. These are asset classes designed to reduce exposure to inflation overall. The exact vehicle used varies. The gold standard for a hedge against inflation is, well, gold itself, which not only holds value but tends to increase, steadily, over time.

But recently, cryptocurrency has been giving gold a run for its money as an inflationary hedge. Here’s a quick look at how a cryptocurrency-based hedge against inflation works.

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Long-Term Goals

Investing in a particular asset class as an inflationary hedge isn’t about realising short-term gains. Instead, it’s about achieving long-term financial goals. There are two basic approaches.

The first method is to move money into hedge asset classes at the start of periods of high inflation, sheltering them until the storm is over. Once that period has passed, investors can reduce holdings in those asset classes to take advantage of short-term opportunities.

Another approach is to always devote a significant portion of your portfolio to certain asset classes. This is a long-term and more hands-off approach, one that equips an investor’s portfolio to handle repeated times of high inflation.

Key Asset Classes

Diversification is key. Governments measure inflation by looking at the overall price of a basket of goods and services from the economy. Overall that’s a great approach, but it can overlook the uneven impact of inflation in a real economy. Not every product will increase by the stated rate of inflation, so diversifying in a number of asset classes helps to spread out the impact of inflation.

Stocks and bonds can be popular inflationary hedges. The latter’s steady, slow rate of return can be appealing, while stocks hold the potential for growth that outpaces the rate of inflation. At the same time, there’s considerable risk associated with the stock market.

Real estate offers another option. But while a second revenue stream from property investment sounds appealing, steep capital gains taxes are less so. Other recent changes to the law have served to lessen real estate’s value as an inflationary hedge.

That leaves commodities as one of the major hedges against inflation – and that’s where crypto comes in.

Cryptocurrency as an Inflationary Hedge

Cryptocurrencies aren’t simply a commodity, but they do sometimes function like commodities. This is particularly true for Bitcoin. The original cryptocurrency has been compared to gold so many times that the argument is wearing thin, but it’s true that Bitcoin has proven to be an effective long-term holder of value.

It’s also true that cryptocurrencies don’t need to act like commodities like gold in order to be an effective hedge against inflation. They could also operate more along the lines of the stock market, with a focus on currencies with the potential for long-term growth. Call it a HODL crypto inflation hedge; a diversified portfolio of cryptocurrencies, including Bitcoin and Ethereum, as well as carefully-selected altcoins.

No one strategy is sufficient, but cryptocurrency has a clear role to play as an inflation hedge.

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JPMorgan Chase & Co. strategists have said that they believe “the perception of Bitcoin as a better inflation hedge than gold
is the main reason for the current upswing, triggering a shift away from gold ETFs into Bitcoin funds since September [2021]”.

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