It is not a secret that inflation has become a popular topic among different world economies. Although we witnessed years of zero inflation rate, today the world is entering a new phase of inflation. Of course, investors are constantly searching for ways to protect their assets during such hard periods.
Inflation and its impact on investments
The overall increase of prices, also known as inflation, is a difficult topic, which deserves many analyses.
Anyway, we will try to understand exactly how inflation works by some real life examples.
So, let’s say an investor has $20,000 on the stock market and that there is an 8% yearly inflation rate. That would mean that if he manages to gain 6%, he will be losing money.
That is because his nominal rate of return is lower than the annual inflation rate.
Inflation leads to a loss in the value of money, leading to more people searching for a hedge asset against it. Before we enter the topic of cryptocurrencies as an investment, we will look at another valuable asset - gold.
Surely you have heard about bitcoin being the new gold. Anyway, for many, it can be hard to understand without understanding the exact role of gold in the financial world.
Actually, there are some studies proving a strong relationship between the price of gold and inflation rates. It is proven that during periods of inflation, the price of gold tends to become higher. One of the last examples of that was in 2007 when it peaked at $1,900.
And while some geopolitical problems, Brexit for example, brought gold to a rally mode, the Covid-19 pandemic brought a new increase of its price.
It is not a surprise that Main investors are looking for safe assets to move their money to In volatile periods. Such a period we are experiencing right now.
And while investors are sure that gold is a good investment, they can not say the same about cryptocurrencies, as they are extremely volatile.
Can we compare gold and crypto?
God has been used for Commerce and wealth storage for thousands and thousands of years. At the meantime, cryptocurrencies have existed for a little more than a decade but have quickly gained worldwide popularity.
The gold trading and tracking system is flawless and is hard to be faked.
Cryptocurrencies encrypted and decentralized systems make it hard to steal. It has a regulatory infrastructure ensuring users’ safety.
And while gold is a famous asset in different areas and has a large utility, we can not say the same about crypto as its utility is limited. Right now, we seem to be far from the mass adoption of cryptocurrencies. Anyway, it is clear that crypto has made some steps towards becoming a payment system.
With that in mind, it would be a mistake to completely dismiss crypto utility.
What does the data say?
We can see that traders are still not treating Bitcoin or other cryptocurrency as gold. Moreover, there is a lack of correlation between the price of gold and the price of Bitcoin. And still, cryptocurrencies are much more risky assets to invest in.
When the inflation rate goes up, investors tend to avoid taking risks and prefer moving their money toward safer markets.
Although the role of cryptocurrencies as an inflation hedge seems quite limited at the moment, it is possible that we see some changes in the future. We will wait and see.
While crypto may not be the best investment in times of inflation, that doesn’t mean that you can not make some money out of it. Here at cryptoarbi.com, we can help you find the best trading opportunity and turn it to your favor. Trust us, and we will do the work for you.