Inflation Hitting Record Highs
On January 12, 2022, the United States Bureau of Labor Statistics reported that the consumer price index for all items rose to a record 7.0% year-over-year for the month of December 2021. Based on the last three months’ trend, if an employer were to offer less than a 6.66% wage adjustment for the new year, they are effectively giving their staff a pay cut.
Rent across the US increased 3.3% last month.
Meat, poultry, fish, and eggs as a group increased 12.5%.
Those living in the northern hemisphere using natural gas to heat their homes this winter can expect to pay 24.1% more.
These levels of inflation have not been witnessed since 1982, and there are many differences in our situations since then. A pandemic enters its third year, an overall rejection of the normal employment paradigm has led to a wage shortage, and an all-time-high stock market is frankly disconnected from the reality that everyday Americans are facing on the ground.
So what are good investment options when the money in one’s bank account is actively losing value and confidence in the market just isn’t there, even for institutional investors?
Gold has traditionally served as a hedge against inflation and a solid store of value for those looking to diversify. As we start the year 2022, the position cryptocurrencies have gained for those seeking diversification can no longer be ignored. While no one will advocate for an all-in on the next breed of dog token in line to be pumped, the leading cryptocurrencies by market capitalization do prompt consideration for those seeking solid returns with arguably comparable risks to a stock portfolio in the current market conditions. This is not to mention the future upside of innovation and more widespread adoption that crypto is likely to experience during the next 5 years.
Dealing with the emotion of holding Bitcoin and other cryptocurrencies has been an issue for investors, but this is by no means new territory. There are legendary stories of so-and-so giving his buddy 5 BTC for beer money as a joke in the early days, just for that friend to lose their wallet and never see the potential for his $345,000 return by mid-late 2021. As if they would have held it that long, let alone timed the top perfectly… The tradeoff between electing to invest solely in stocks or adding cryptocurrency as a hedge to current market forces carries a natural tradeoff. Volatility is ever-present in crypto, and a new investor might be shaken by the intraday drops and recoveries that some tokens can experience. The general consensus is to buy and hold for the long term based on fundamentals and utility of the platform or token. From what has been observed in the past with these tragically comical stories of people missing out on huge gains, sometimes the best thing is to set it and forget it when it comes to managing your cryptocurrency portfolio.
With well-researched picks, one can buy and hold cryptocurrencies just like stocks and experience solid gains to keep them above market trends. Delving one layer deeper though, these cryptocurrencies themselves can put to work, just as with fiat cash. With smart contract platforms on Ethereum, Binance Smart Chain, Solana, or Fantom (among others), one can begin to scratch the surface of newly emerging Web3.0 technologies that offer decentralized finance and liquidity mining as an investment strategy for those seeking higher risk and higher rewards. Even Fidelity’s Digital Assets arm agrees that institutional interest in decentralized finance is expected to increase, likely attracted by the yields many platforms are offering.
Fundamentals and Forced Adoption
Cryptocurrencies and the blockchains they operate on have unique characteristics that our current financial systems do not. Extraordinary transparency is granted through sites like as Etherscan.io, where all transactions can be viewed on the public ledger. A breached contract in the “real world” must be brought to a judge for enforcement. This takes time, money, and effort while placing the onus of enforcement on the party seeking relief. Conversely, smart contracts on the blockchain are automatically executed via code, offering security and confidence for both parties upon mutual agreement. Finally, decentralization places a particular blockchain’s ecosystem into the hands of its adopters and users. The value of a network lies in the perception and sentiment of those who find utility in it, thereby creating a sort of “shareholder” relationship where every user has a stake in a network’s success.
In the event of a serious economic downturn and subsequent recession, one must also consider where the flow of remaining retail investor funds, or at least a portion thereof, will go. The Venezuelan government’s response to hyperinflation in 2018 was a pivot to a state sanctioned oil & mineral-backed cryptocurrency. While much can be said about the government’s handling of fiscal policies, it is true that everyday Venezuelans have turned to cryptocurrencies to solve their monetary issues, albeit not so much the government’s questionable “Petromoneda” token.
Picture a worst case scenario for the United States whereby a catalyst finally decouples the market from its wild overvaluations, institutions demand their government handouts, and taxpayers are inevitably left holding the bag. It is hard to imagine how this would not be a turning point for cryptocurrency adoption for many Americans. As we find ourselves in a market seemingly teetering on the peak of recurring weekly all time highs, even a modest investment right now in well-established tokens could be one of the best insurance policies a person could have.
This article represents the sole opinion and assessment of the author and is not intended to be construed as financial advice.