Even if not, the after-effects of Covid 19 that we are experiencing now are showing no signs of going. Relaxation of restrictions came with some government policies that caused inflation. Why?
Most governments but mostly the US, choose inflation over natural market conditions to save dying businesses and distribute free money to everyone in the US to stimulate the economy to compensate for the lack of salary.
This coupled with a decrease in stockpiling as companies’ productivity plunged, increased the rate of demand. With few goods in circulation and high demand for them, certainly, the price of goods would only go up while the American Dollar reduces in value.
It is likely to continue in 2022 because the current chairman of the FED, Jerome Powel, removed the word ‘transitory’ describing the current high inflation in recent news. He said, “It is probably a good time to retire that word,” to describe it.
It is almost certain that the US would be in inflation in 2022, while some developing countries would go down as far as being plunged into recession.
What Does the Inflation Debate Say?
The Federal Reserve, whose chairman is Jerome Powell, believes that inflation’s average rise would be above 2% while it starts to fall afterward.
The president of Investment Firm Independent Strategy had a different opinion. He said inflation could rise to 4% around mid-2022. Also, Michael Harnett, a financial strategist at Bank of America holds a similar view. The latter predicts that the economy could stay at 4% longer than FED predicted.
Economy thinkers believed that FED prediction undermines consumer spending roles in inflation, hence why its prediction is lower. Also, it is worth noting that a price increase would increase consumer demand for higher wages, which in turn fuels inflation. Without pragmatic measures, the vicious inflation cycle would keep ongoing.
What Are the Consequences?
While US citizens can be happy about high wages in the short term, with free money or assets not losing value. Big inflation means rising prices of everything.
For example, an equivalent of 35% of all US dollars has been printed in the last two years. Some assets like oil or housing are already blooming everywhere. It is just a matter of time until it affects other kinds of business. What happens? Money reduces in value, and other countries see capital outflows.
Who Would It Affect Most?
Holders of Cash: People that hold large amounts of cash would see their money reduced in value. Without turning it into a proper asset that would retain its value, the cash could be a shadow of itself a few months into inflation.
Government of Other Countries: As many countries rely on US dollars for transactions, its high inflation would make it appealing compared to other currencies. This would result in capital outflow out of these countries into Dollars to gain high returns subsequently.
Excessive capital outflow affects the economy of a country, leading to slow economic growth and high-interest rates in these counties.
Some countries which pay in dollars would have trouble paying back loans, while others, if not well managed, may lead them to a full-fledged recession.
Cryptocurrency: The Perfect Hedge
As A Deflationary Asset
Investors will look for deflationary assets to protect their wealth. Assets are also called stores of value that have limited supply. This is good for bitcoin. Why?
Cryptocurrency has been gaining wide popularity and usage in recent times, especially Bitcoin. It is known as a store of value that can give Mouth-watering returns on investment over time. Bitcoin is now known as digital gold. And which would investors prefer, holding their cash while it reduces in value or putting them in cryptocurrency like Bitcoin while it appreciates?
Let us take a look at Bitcoin’s price and its growth potential.
Bitcoin has a capped supply of 21 million, so it has little to no chance of inflation. Its circulation can’t be regulated as it is not controlled by a central body. This makes it the perfect store of value.
The 2021 inflation never affected Bitcoin, rather, it continued to grow in price. It was traded around $5000 when the covid 19 pandemic hit. Since then, it has increased by a whopping 235%.
Some analysts even believed that its price could clock $100000 by the end of 2021. In contrast, inflation surged. The inflation rate was at 2.6% in March and had risen to 5.4% in June. Inflation never affected Bitcoin. So, why not hedge Bitcoin as a deflationary asset option.
A Hedge Against Government Bad Policies
Banks and other financial institutions are owned and controlled by the government. They can control individual wealth at their whims and caprices through banks. This has seen people’s wealth suffer from bad government policies.
Due to the government’s bad behavior, people are looking for alternative ways to manage their wealth by holding portfolios on the blockchain instead of banks. This is good for smart contract platforms such as Ethereum or Solana.
This consequently put them in a decentralized system. They are neither controlled by stringent monetary policies nor at risk of inflation. Their transactions would be sinister and devoid of government eyes, suspicion, and control.
Censorship Resistant Technology
Overall, people will look for censorship-resistant technologies, which is what crypto is by design. So, it’s good for the whole crypto market. Authoritarian government censorship would not affect people’s wealth as it is neither under their control nor are those people identically attached to transactions. Let’s take Venezuela and Zimbabwe for example;
Venezuela had been in pent-up inflation for years. Bolivares, the Venezuelan fiat currency, is worthless. Millions of citizens had fled the country as they could not eat nor buy things. Goods are so expensive that Bolivares is as good as scrap paper.
They could not change the situation as they are ruled by an authoritarian government. The rulers had no interest in doing so. However, the advent of Cryptocurrency gives them an exciting option, their money passes through no government censorship.
If they receive a fiat currency from abroad, they are either denied access or charged over 50% on the currency. However, with cryptocurrency, no one knows which currency Venezuelans receive. They can trade Bitcoin at their will and withdraw in Bolivares without stringent censorship from the government.
Similarly, someone in a refugee camp needs no bank to trade crypto assets and make transactions. Internet connection is enough. In the same way, Xi Jinping of China cannot control its citizens’ crypto assets as it is not in a centralized system.
This censorship restrained citizens from holding their crypto assets in the country without anyone knowing. It could be in a cold wallet in a flash drive or an online wallet. As their identities are not tied to their assets, no one knows who trades what.
Even reputed investors are not sleeping on inflation. They had started investing their wealth in cryptocurrency. A tweet by Bitcoin News on November 29, 2021, texted on how Robert Kiyosaki, popular author of the best-selling book, Rich Dad Poor Dad plans to edge his wealth with Bitcoin and Ethereum.
Conclusion
Amid the rising inflation that is going to rock the world for a little while, the best thing is to hedge your wealth. In the past, investors had chosen gold or silver to preserve their wealth. But with cryptocurrency now in the mainstream, there is no better way to hedge your wealth than the booming network.
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Written by: Narender Charan
