There’s a cost of living crisis that’s affecting countries around the world. The economic fallout of the pandemic, the Ukraine invasion by Russia interrupting energy and supply chains, and other influences such as Brexit are all having a knock-on effect on the global economy.
In the last six months, food prices have shot up and inflation rates in Australia are set to hit 5.9% this year in response to the ongoing financial fluctuations. In fact, inflation rates are rising across the board, with the UK seeing the highest inflation rates in 40 years.
With question marks around what comes next, many people are pivoting in order to boost their personal finances. One route that’s become an option is investing in cryptocurrencies. But is this this form of hedging the lucrative plan B that investors think it is?
Why use hedges against inflation?
Inflation is a standard part of how any economy works. It fluctuates in line with how a country’s finances are behaving. However, at times when inflation rates are high and there’s a chance that there’s going to be a drop in a currency’s value, inflation hedging can offset the impact of the falling prices.
This type of hedging usually involves investing in assets that are expected to perform well and provide a decent return. Additionally, inflation hedging can protect an existing investment’s value. Although, there’s a risk that the higher inflation levels can result in the investments selling at a loss.
Why use bitcoin as a hedge?
One hedge that’s becoming increasingly popular is bitcoin hedging. Investors are turning to this digital currency because it’s in limited supply and decentralised. These two features make it both resilient and in demand, therefore an attractive prospect.
Another key point to factor in is that bitcoin has been used to beat inflation and continues to be something investors are turning to. The cryptocurrency has increased in value, performing better than the rate of inflation. Even in recent years where the economy has been impacted by the pandemic, bitcoin has grown significantly.
Is bitcoin secure?
Although bitcoin looks like a great prospect, there are some drawbacks. First, this idea that it is a good hedge against inflation is in question. As forex trader specialists FXCM explain, “This makes sense in theory, because money loses its value and has less purchasing power when inflation rises. A look at Bitcoin’s performance during this recent period of elevated prices, does not support this theory”.
Also, it’s volatile. There isn’t a clear path to how well it will perform and there’s a lot of risk attached to it. Additionally, it’s not completely secure and there is a potential for cyberattacks.
So, while there’s a chance that bitcoin could be an inflation hedging option, there’s uncertainty around how secure an investment this is.