Inflation is back as an issue for day to day life as well as for your investments. One of the leading arguments for investing long term in cryptocurrencies is that crypto can be a solid hedge against inflation. If that is the case, which cryptocurrency is the best inflation hedge and why? And how should you go about investing in that specific cryptocurrency over the long term?
Bitcoin Versus Ethereum As Protection Against Inflation
The two leading cryptocurrencies can be used to hedge against inflation but the reasons why they may be useful differ. Bitcoin has an eventual top number of tokens that will ever exist. Thus it is sometimes compared to gold bullion as an asset that will likely retain its purchasing power value over the years better than major currencies like the US dollar, yen, euro, Swiss franc or any other currency. Ethereum, on the other hand, does not have a top number of tokens but rather fluctuates according to market conditions. Ethereum’s value comes from its use in smart contracts and the business side of cryptocurrency much like the original intent of Bitcoin years ago. Which of these advantages will bear fruit making the underlying token solid protection against the erosive effects of inflation?
How Inflation Defeats Investments
In the modern world investments are denominated in currencies. A well chosen investment increases in its value in its underlying currency. The problem for the investor is that if the underlying currency is prone to inflation the investment loses its purchasing power over time. Thus an investor may end up with more money but less purchasing power over value over the years. This is a common issue with savings accounts, bank CDs, corporate bonds and US treasuries. It is a reason why many choose Treasury Inflation Protected Securities or TIPS instead of standard treasuries. This is also why many investors choose risky stocks in hopes of staying ahead of inflation. In regard to the use of either Bitcoin or Ethereum as an inflation hedge what are the arguments pro and con and which is your best choice?
Bitcoin As Digital Gold
Many advocates of Bitcoin compare it to gold as an investment because both are scarce and tend to hold their purchasing power when inflation eats away at currency values. There will never be any more than 21 million Bitcoin tokens. That limit will be reached within fifteen years. Both Bitcoin and gold are independent of government manipulation unlike currencies which can be “printed” at will to cover excessive spending. An advantage that Bitcoin has over gold is that it is readily transportable across the globe as a digital asset whereas transporting gold bullion can be costly and risky.
Inflation Image Courtesy of Britannica Money
Ethereum As a Safe Inflation Hedge
Ethereum is closer to the original purpose of Bitcoin than Bitcoin is. It is widely used in financial transactions and especially digital smart contracts. Thus it has intrinsic value not associated with scarcity but rather with its ability to help make money. Over the long term, in our opinion, Ethereum will more resemble a value stock with growth potential while Bitcoin will more resemble a commodity with less growth potential.
Can a Volatile Investment Asset Be an Inflation Hedge?
Many who are investing for retirement prefer so called widow and orphan investments. That is, they look for security of their investments and reliability of being able to take cash from their investments for living expenses. Volatile assets create a problem for these folks because just when they need money may be just when the asset loses value. In this regard in the last seven years Bitcoin has seen a huge degree of volatility. It peaked in the $60,000 range late in 2019 and fell as low as $9,000 per token in May of 2020. Then it recovered and rose to well over $100,000 a token before falling back to the $60,000 to $80,000 range. Ethereum is priced much lower than Bitcoin, trading in the $2,000 range. Nevertheless, Ethereum has experienced similar price swings. Anyone looking for a secure and predictable inflation hedge needs to keep this in mind when investing.
Are Stable Coins a Viable Crypto Inflation Hedge?
If you want a predictable crypto asset for long term investment, how about a stable coin like USDT or USDC? These assets did not experience the volatility seen in the wider crypto market including Bitcoin and Ethereum. However, these assets are pegged to the US dollar or other fiat currencies which makes them similar to holding CDs from your bank or US treasuries. While you can lend your stable coins and earn interest you will have the same issue of having to earn a rate higher than the rate of inflation to make this strategy work. A viable strategy might well be to hold part of your crypto assets as Bitcoin or Ethereum and part as a stable coin earning interest in order to maintain the ability to have access to funds no matter how the crypto markets are doing in the short term.