The USA is seeing the worst inflation in forty years. When high rates of inflation eat away at the value of the dollar many investments produce a negative return on invested capital. During the stagflation of the 1970s and early 1980s gold went from $32 an ounce to touch $800 an ounce before backing off. The argument can be made that today a better choice than gold for fighting inflation is cryptocurrency. While central banks like the Federal Reserve can print money, major cryptocurrencies have either capped their circulation growth or fixed the number of coins that can be produced. So, are crypto investments inflation proof and a good way to guard and grow your wealth as inflation soars?
How Do Cryptocurrencies Perform During Inflationary Cycles?
The truth of the matter is that no one knows. Bitcoin came into being in 2008. That was when the Financial Crisis threatened the global economy, the US Federal Reserve dropped interest rates to near zero and over the last decade negative interest rates have been the norm in Japan and Germany. Nearly 90% of all bitcoin has already been mined so we will not see more dumped into the market. But, we may see a US Digital Currency in the near future that could play havoc with the value of Bitcoin.
Bitcoin: Investment, Speculation, or Inflation Hedge
Where is Bitcoin going in 2022? As we noted in an article on that subject, bitcoin enthusiasts are predicting a $100,000 top for the year. This is after the cryptocurrency fell from $67,000 in November of 2021 to $35,000 in late January of 2022. It would certainly be very satisfying to buy bitcoin today as an inflation hedge and see it triple in value before the year is done. However, the point of hedging against inflation is to protect your wealth when the value of the dollar falls. One of the questions about bitcoin at this time is how it will respond to greatly higher interest rates if the Fed needs to go all out in its attempts to tame inflation. Higher interest rates drive up the value of the dollar on the Forex market and against commodities from gold to coffee to wheat and corn. Many economists still believe that the current inflation surge is due to supply chain glitches due to the Covid Pandemic and pent up consumer demand. If that is in fact the case we will probably see 3% inflation instead of 7.5% inflation by the end of the year. That lower rate of inflation will likely help drive stocks higher and not be helpful to traditional inflation hedges like real estate, gold, or inflation protected US Treasuries.
What Drives Crypto Prices?
For those with the capital to invest and the wherewithal to tolerate wild swings in price, investing in bitcoin and other cryptocurrencies has been rewarding. What seems to drive crypto prices are investors looking for long term gains and speculators looking for short term profits. Fear of missing out (FOMO) tends to attract new investors into every upswing just in time to see them lose a large portion of their investments. Who gets hurt in the next bitcoin crash will be those who do not have the resources to stay the course as the biggest cryptocurrency fluctuates up and down. If you are looking at cryptocurrencies as a way to make money and have the ability to hang in there over time that is one thing but if you are viewing cryptocurrency investments as inflation proof that is in no way a sure thing.
Are Crypto Investments Inflation Proof? – Slideshare Version