Crypto will become an inflation hedge – but not yet
Crypto can act as an inflation hedge, but not until it has established its fundamentals and achieved mass adoption .
In theory, Bitcoin (BTC) should serve as a hedge against inflation. It is easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.
However, investors don't treat it that way. Instead, the cryptocurrency market mirrors the stock market. Why is that? Let's look at what prevents cryptocurrencies from acting as a hedge against inflation and what needs to happen to make it a hedge in the future.
Crypto Could Be a Hedge, But It Has DownsidesCryptocurrencies present a unique solution, given their lack of a governing central bank. You can't lose faith in something that doesn't exist. Its supply is finite, so it naturally increases in value. People using a blockchain with proof-of-stake protocols can access their funds at any time, while continuously earning staking rewards on their current balance. This means that the actual value of the annual percentage return is tied to the economic activity of the chain via its treasury and staking reward distribution mechanisms. These properties seem to tackle the cause of inflation in traditional monetary systems, but some obstacles remain.
Related: Inflation Getting You Down? 5 Ways to Accumulate Crypto at Little or No Cost
To get started, let's look at why people invest and hold cryptocurrencies. The majority of cryptocurrency holders see the future potential of these technologies, which means that some of their value is not currently present. These are speculative investments. Decentralization was achieved by Bitcoin, but its exuberant energy costs remain unaddressed, and the majority of mining forces are still clustered in a dozen mining pools. Ethereum has similar issues with power consumption and centralized mining pool. Ethereum also has a security problem — over $1.2 billion has already been stolen from its blockchain...
Crypto can act as an inflation hedge, but not until it has established its fundamentals and achieved mass adoption .
In theory, Bitcoin (BTC) should serve as a hedge against inflation. It is easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.
However, investors don't treat it that way. Instead, the cryptocurrency market mirrors the stock market. Why is that? Let's look at what prevents cryptocurrencies from acting as a hedge against inflation and what needs to happen to make it a hedge in the future.
Crypto Could Be a Hedge, But It Has DownsidesCryptocurrencies present a unique solution, given their lack of a governing central bank. You can't lose faith in something that doesn't exist. Its supply is finite, so it naturally increases in value. People using a blockchain with proof-of-stake protocols can access their funds at any time, while continuously earning staking rewards on their current balance. This means that the actual value of the annual percentage return is tied to the economic activity of the chain via its treasury and staking reward distribution mechanisms. These properties seem to tackle the cause of inflation in traditional monetary systems, but some obstacles remain.
Related: Inflation Getting You Down? 5 Ways to Accumulate Crypto at Little or No Cost
To get started, let's look at why people invest and hold cryptocurrencies. The majority of cryptocurrency holders see the future potential of these technologies, which means that some of their value is not currently present. These are speculative investments. Decentralization was achieved by Bitcoin, but its exuberant energy costs remain unaddressed, and the majority of mining forces are still clustered in a dozen mining pools. Ethereum has similar issues with power consumption and centralized mining pool. Ethereum also has a security problem — over $1.2 billion has already been stolen from its blockchain...
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