Cryptocurrencies against ‘silent thieves’. Can Bitcoin Protect Capital From Inflation?

The world is becoming increasingly volatile and uncertain. The claim that “inflation is the silent thief” is becoming less and less relevant. In 2021, inflation has become quite a big and brazen bandit. Currently, inflation is at its highest level in forty years, having exceeded 5% in Europe and reaching 7.5% in the United States. The conflict between Russia and Ukraine affects the future prices of gold, wheat, oil, palladium and other commodities. High inflation in the US and Europe has become a real threat to the capital of tens of thousands of private investors around the world.

Last week at the Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Jerome Powell said that he would recommend cautiously raise interest rates. At the same time, Powell also mentioned that he expected the crisis in Eastern Europe not only to lead to an increase in the prices of oil, gas and other commodities, but also to spur inflation. Powell also clearly reaffirmed his determination to raise rates when necessary, even if it causes a recession.

Crypto to the rescue

Many investors are looking for ways to protect their savings from inflation by using cryptocurrencies.

Chad Steinglass, head of trading at CrossTower, is skeptical of cryptocurrencies as a defensive asset. Steinglass commented to Cointelegraph:

“It is important to remember that cryptocurrencies are still a nascent asset and trade more like a speculative asset than a defensive asset.”

Indeed, cryptocurrencies differ from fiat currencies in their volatility. Even the most stable cryptocurrencies, Bitcoin (BTC) and Ether (ETH), which is of great interest to institutional investors, can rise and fall by tens of percent within a day.

Of course, there are more use cases for Bitcoin every day, and it already acts as a base layer for the emerging alternative financial system. In the long run, this trend will develop, not only increasing the price of Bitcoin but also gradually decreasing its volatility.

To protect money from inflation, investors buy gold, cash, or real estate. Speaking to Cointelegraph, Paolo Ardoino, chief technology officer at crypto exchange Bitfinex, compared Bitcoin to gold:

“In particular, cryptocurrencies and Bitcoin have unique properties and are a form of digital gold. In particular, it has shown to work well when money is being eased by central bank stimulus methods. This was, of course, one of Bitcoin’s original intentions – to protect people from this very phenomenon.”

Jeff Mei, global chief strategy officer of digital asset platform Huobi Global, shares this view. Mei said that Bitcoin is a great hedge against inflation as there are only 21 million Bitcoins available after all of them are mined.

Derivative or not?

Investors often use derivatives in traditional financial markets to hedge their savings against inflation. Rachel Lin, co-founder and chief executive officer at exchange SynFutures, said that by using derivatives like Bitcoin futures, investors can gain exposure to BTC with less capital. much and limit potential losses.

However, Ardoino does not recommend investors to use crypto derivatives for this purpose. He thinks that having direct exposure to Bitcoin, what he calls “the king of crypto,” is preferable.

In addition to Bitcoin, Mei considers Ether to be one of the most stable digital assets. He chose Cointelegraph that Ethereum competitors like Polkadot (DOT), Terra (MOONLIGHT) and Solana (SOL) can also be viewed as a store of value.

Lin pointed out that if investors are simply looking for a way to earn a fixed income, they can convert their fiat to crypto and deposit it on some of the larger centralized financial platforms. (CeFi) or blue-chip decentralized finance (DeFi) protocols. In terms of possibilities, this is far more profitable than depositing cash in the bank.

Steinglass remains skeptical about comparing cryptocurrencies to the dollar given the current situation as the conflict in Eastern Europe causes the USD to spike in value against many other currencies as everyone jostles for stability. . For now, the demand for dollars has outstripped inflation fears. Steinglass added:

“On the one hand, cryptocurrencies are an element of a much-needed alternative money system and store of value, and on the other hand, they remain a risky asset at a time when investors around the world are is minimizing risk.”

Is gold the answer?

None of the experts interviewed by Cointelegraph mentioned gold-backed stablecoins like PAX Gold (PAXG) as their preferred defensive asset. Historically, however, gold has been a traditional instrument used to protect capital during times of financial turmoil. Gold does not stop increasing in price over time. Throughout 2021, the price of gold is in the range of $1,700 to $1,950 per ounce. It added up to $2,050 per ounce by 2022.

Institutional investors are showing a growing interest in gold-backed stablecoins, but the same cannot be said of the younger generation of retail investors. Perhaps the main problem with gold-backed stablecoins as a hedge against inflation is not the technology but the ideology. For many crypto people, both fiat currencies and assets like gold represent old values.

It is clear that in 2022, inflation will still be a threat to investment capital and the crypto industry has yet to find an answer to the question of combating this “silent thief”.