Investing in Crypto in a Hyper-Inflationary Economy

Inflationary economies erode the value of saved money and slow down the economy. This causes citizens to prioritize spending over saving, decreasing their savings account value. As a result, people often seek to hedge against inflation by investing in assets like gold in such a situation. While gold has long been a popular choice, crypto has been gaining in popularity in recent years.

Bitcoin as an Inflation Hedge

It may seem hard to believe, but recent reports show that the annual inflation rate in the U.S. topped 8.5%. In other parts of the world, annual inflation rates are skyrocketing. Some economists worry that this bout of inflation will last and permanently damage the global economy. If this scenario continues, Bitcoin may be an inflation hedge. Indeed, JPMorgan Chase has reported on institutional investors buying bitcoin as an inflation hedge compared to gold.

While Bitcoin isn't the best inflation hedge, some analysts claim it is a great alternative to fiat currencies. Experts like Ray Dalio and Paul Tudor Jones have compared it to gold in the 1970s. In Zimbabwe, the country's hyperinflation has led to the introduction of the Real-Time Gross Settlement (RTGS) Dollar, a credible currency. But that didn't solve the problem completely.

In a hyper-inflationary economy, the price of a dollar or any other currency can increase by more than 50% in a single month. Inflation is good when it's moderate and can be catastrophic when it rises too high. Hyperinflation has happened in Zimbabwe, Hungary, and the former Yugoslavia, where the government increased the money supply to combat the economic crisis. During these periods, people were investing in gold and other assets to avoid being left behind. Bitcoin has played a role during these inflationary periods.

Gold as a Better Inflation Hedge

One reason why gold is a better inflation hedge than cryptocurrencies is its limited ability to act as a medium of exchange. A study by former commodities manager Claude Erb and Duke University professor Campbell Harvey showed that gold's inflation-hedging ability is more reliable when measured over a longer period. However, bitcoin and other cryptos tend to behave like riskier assets during systemic market selloffs.

The early 2000s was a decade of economic growth, driven by lower taxes and productivity increases. As a result, inflation was relatively low, so there wasn’t much reason to own gold or precious metals as an inflation hedge. But then everything changed: interest rates dropped to near zero and have remained there for nearly a decade, along with government deficits that are higher than ever before. 

These changes mean that we’re looking at years of negative real interest rates—which means that our money loses value over time. Gold has been on a tear because it is one of the only good inflation hedges available to protect you from having your money eaten away by inflation. So if you think that hyperinflation is coming, owning some physical gold might be a great way to preserve your wealth. On top of that, if you’re investing in crypto, holding some physical gold will also help offset any losses due to volatility in crypto prices. This can be especially helpful when markets are experiencing extreme highs and lows.

Stablecoins are subject to inflation

To maintain purchasing power, stablecoins need to cut off all ties to banks and find ways to keep the collateral outside the banking system. Otherwise, inflationary pressure will build-up, and the stablecoin and collateral will start to circulate. This is the opposite of crypto design: to create value outside the banking system. Currency stablecoins, on the other hand, lack this value. A good example of an asset-backed stablecoin is the Digital Trade Coin (DTC), a cryptocurrency with a positive carry.

While stablecoins are subject to inflation, they are still better than nothing at all. Unlike the fiat-backed currencies, stablecoins are not subject to speculative inflation. As a result, they can provide easy access to the global financial market. This is especially useful for those citizens who live in hyper-inflationary countries.

Because stablecoins are decentralized and not centralized, governments are unlikely to oppress their citizens. As a result, stablecoin development has been slower than other cryptocurrency technologies. Yet, the fact remains that the use of stablecoins is increasing significantly. Of course, the current situation is not optimal for a stable coin since USD inflation is increasing. But with the increasing use of Bitcoin-based stable coins, they could prove to be a great alternative to fiat money.

Regulation of Cryptocurrencies During Hyperinflation

The regulation of cryptocurrencies is a hot topic right now, and there’s no way to tell what will happen. Some people think they’ll be able to purchase everything they need, while others believe that only those who can afford them will benefit from crypto. Whatever happens, investors should keep track of current trends and regulations. They should prepare to deal with any changes that could come their way. Before you go out and buy crypto as a hedge against hyperinflation, know your investment options. There are many different cryptocurrencies and various exchange rates between them. You must carefully research these options before taking action to decide what currency(ies) would be best suited for your needs in a hyper-inflationary economy. 

However, no matter what stance governments take towards cryptocurrencies, they will not necessarily hamper cryptocurrency use. Due to poor state management, cryptocurrencies do not operate like traditional currencies in most countries. Therefore most transactions are done on a peer-to-peer basis through online exchanges or locally where allowed by law. Cryptocurrencies are also increasingly being accepted as payment by merchants worldwide (the best example being Japan). This means that even if fiat currencies lose value after there is an enaction of regulatory control, demand for cryptocurrencies may still remain high among users looking to use them for everyday payments.

Last Thoughts

While higher inflation can be good and bad, it is disastrous when it reaches unmanageable levels. In a hyper-inflationary economy, citizens prioritize spending over saving. Inflationary economies tend to slow economies. So, people often invest in gold and other assets to protect their money from falling value. Cryptocurrencies, like Bitcoin, have proven to be a useful hedge against fiat-currency inflation.

As a result, a hyper-inflationary economy will make it difficult to create stable money for Bitcoin. This is the primary reason why Bitcoin prices are not stable. The only thing keeping Bitcoin from being money is its price. Bitcoin prices are constantly changing because the dollar price of bitcoin is going up. This is because the dollar profits of these companies determine the efficiency of distribution.