Crypto will become an inflation hedge just not yet

In theory, Bitcoin (BTC) should act as a hedge against inflation. It is easy to access, has a predictable supply, and cannot be arbitrarily manipulated by central banks.

But investors don’t treat it that way. Instead, the cryptocurrency market mirrors the stock market. why is that? Let’s delve into what prevents cryptocurrencies from acting as a hedge against inflation and what we need to do to hedge cryptocurrencies in the future.

Cryptocurrency could be a hedge, but it comes with inconvenience

Cryptocurrencies offer a unique solution given the lack of a central bank. You can’t lose faith in things that don’t exist. Its supply is finite, so it is naturally more valuable. People using a blockchain with a Proof of Stake protocol 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 yield is tied to the economic activity of the chain via its treasury and staking reward distribution mechanisms. While these properties appear to address the causes of inflation in traditional monetary systems, some obstacles remain.

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First, let’s examine why people invest and hold on to cryptocurrencies. The majority of cryptocurrency holders future The potential of those technologies, that is, part of their value, is not Current Current. They are speculative investments. Decentralization has been achieved by Bitcoin, but its extremely high energy costs are still unaddressed and most of the mining power is still concentrated in a dozen mining pools. Ethereum has similar issues regarding energy consumption and mining pool centralization.Ethereum Has Security Problems Already Over $1.2 Billion Stolen Blockchain this year.

There is also the issue of decentralized exchanges (DEXs), which are currently less suitable for use than centralized exchanges. Uniswap, the DEX with the highest trading volume, offers inefficient pricing compared to centralized exchanges. A simple $1 million USD Coin (USDC) trade on Tether (USDT) would cost more than $30,000 in fees and slippage than if done on a centralized exchange.

These are technical problems with solutions

Indeed, these issues have been addressed. Some 3rd generation blockchains are tackling energy consumption and decentralization head-on. Privacy is improving. Cryptocurrency holders are beginning to accept that their wallets are always fully traceable, proving attractive to new users who were previously hesitant about blockchain’s ultra-transparency. Projects that seek to blend the mathematical rigor of traditional finance with the unique attributes of cryptocurrencies are tackling the problem of DEX inefficiencies.

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Massive adoption and consolidation are required for cryptocurrencies to act as a bulwark against inflation. Crypto has future value features in an ecosystem that is currently struggling to establish its foundation. The crypto economy still awaits applications that take full advantage of decentralization without sacrificing quality and experience. This is especially important for wide adoption. A payment system that costs $5 per transaction and regularly loses the value exchanged is still not viable.

Until top cryptocurrencies are efficiently used for real-world payments and decentralized applications can offer similar levels of utility as centralized systems, Cryptos will continue to be treated as growth stocks.

Inflation is driven by a lack of trust what crypto still needs

Inflation is not caused simply by printing money. face Assets do not automatically depreciate in value. Between September 2008 and November 2008 he tripled the number of billions of US dollars in circulation, but inflation fell.

Inflation has to do with public distrust of the central monetary system. This lack of confidence, combined with soaring corporate prices, the upheaval caused by the pandemic relief package, and massive disruptions in his chain of supply (partly fueled by the war in Ukraine) have led to the current crisis. The 2021 big bank notes didn’t cause inflation, but they increased it.

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In terms of presence, the supply of funds alone is less of an issue for store-of-value currencies. What is stored is not necessarily part of the circulating supply. Gold, for example, exists in large quantities in the form of jewellery, bullion, etc., but in much smaller quantities in the commodity market. A market that takes into account all the gold mined on earth will have a completely different price. This jewelery and bullion is not traded on the market at all, so it does not affect the supply and demand curve. The same applies to currencies.

Wow Europe’s y/y inflation for July. pic.twitter.com/VGWQ1OQOcB

Arnaud Bertrand (@RnaudBertrand) August 27, 2022

Inflation is the result of a loss of confidence that assets can hold their value over the long term. Since most commodities in this world are finite, all parties aware of increased supply but unsure of monetary policy automatically factor it into their prices. Inflation becomes a self-fulfilling prophecy.

Cryptocurrency as an inflation hedge is possible, but not in the current situation

Cryptocurrencies do not work as inflation hedges during periods of high volatility and market uncertainty. That said, they generally excel in stable growth environments, easily outperforming the market, and their relatively small market capitalization compared to fiat currency makes them do well as growth stocks. Current solutions to usability problems are not sustainable due to their speculative nature and low trading volume. An economically unsound blockchain collapse will affect the entire ecosystem. This means that potential long-term solutions continue to be derailed by scammers.

Related: Is Bitcoin really a hedge against inflation?

The more responsible and diligent the crypto community becomes, the more all sound protocols will benefit, making crypto a true hedge against inflation. Currently, cryptocurrencies follow the pattern of growth stocks, which makes them a good hedge against inflation during periods of stable growth, but not during financial crises. As cryptocurrencies evolve, they will also be an effective bulwark during these downturns.

These days, it is wise to be cautious about investing in cryptocurrencies during periods of market turmoil, not to use cryptocurrencies as the only tool to bolster investments in case of inflation. . However, we see this changing as blockchain protocols continue to mature, increasing the adoption and stability of cryptocurrencies as inflation hedges.

Opinions expressed are those of the author and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended, and should not be construed as legal or investment advice.