How to Preserve Capital During Inflation Using Cryptocurrencies?
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How to Preserve Capital During Inflation Using Cryptocurrencies?

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1 year ago

With inflation hitting 40-year highs and hyperinflation a consistent problem in numerous countries, could stablecoins provide a way for people to store their money and avoid devaluation?

How to Preserve Capital During Inflation Using Cryptocurrencies?

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Within a span of 12 months, the crypto population went from speculating on the next ‘100X coins’ to searching ‘what is crypto winter?’ and ‘how long does a crypto winter last?’ This radical shift in mindset is courtesy of the bearish sentiments prevailing in the market. And it is not all about the money parked in the market.

Bear markets instill fear. They demoralize investors. Forget dollars, we are seeing hundreds of non-fungible tokens (NFTs) and DeFi projects vanishing into thin air. Alongside, the good old — ‘Crypto is a scam, I told you’ has already started to surface. However, the crypto market is not alone. It is correlated to the TradFi (traditional finance) markets, which are down by huge numbers.
The reason for this is rising inflation and the need for the U.S. Federal Reserves to raise rates. Due to the global pandemic, the previous couple of years have been rough for global economies. To stimulate the economy and prevent a full-blown shut down, central banks pushed for easy monetary policies — increasing money supply and lowering interest rates.

Making Sense of Current Inflation in the Global Economy

Recently, the US consumer inflation touched its 4 decades’ peak in May 2022, reaching as high as 8.6%, the highest since December 1981. Adverse impacts of inflation are being felt even by traditional financial markets with all of the 11 S&P 500s sectors ending up in red. If this sounds cruel, how about the situation in Turkey where inflation has surged to over 70%?
The economic strains of the Latin American countries caused by rampant inflation are not a pretty sight with the COVID pandemic and the Ukraine-Russia crisis driving them to the ground. Argentina, in particular, has been estimated to be hit by an astounding 72.6% of inflation in 2022.
On a similar note, Nigeria is suffering from an inflation rate of almost 16.8%. Not only did the Naira, their official currency, take a major hit in purchasing power, but they had a shock of the ages when their central bank raised the interest rates, not even a month after the inflation highs. And understandably, foreign investors are pulling huge funds out of Nigeria. All these numbers and metrics are a mere reflection of the ground reality.
The UK reported a new, 40-year high inflation rate of 9.1%, as cost of living increases due to higher food and energy prices. Canada is facing a similar fate, having reported its highest annualized rate of increase in inflation in over 40 years.
There are legit arguments that the ground reality of inflation is worse than these estimates which only deepens the depths of economic despair and cost-of-living crisis citizens around the world are facing. We can circle back to the prime reason for inflation — the pumping of money, over and beyond need, into the circulation by governments.
What is this all about? How does this result in inflation?

Put simply, more money in the hands of consumers equals more disposable income.

Simple equation but the catch here is the supply of goods and services remain the same which equates to more money chasing the same amount of goods. This situation is tailor-made for businesses to increase the goods’ prices manifold since they know there is enough demand.

This increase in prices results in a fall in the value of the money, as the same amount of money can buy lesser products now.

However, we are facing an unprecedented global crisis — the supply-chain is disrupted by COVID lockdown in countries like China, coupled with the Russia-Ukraine crisis affecting a major exporter of oil and food staples.

What next?

There is a need for financial tools and investment vehicles that help money retain its value, while also maintaining liquidity.

For this particular need, we explore an asset class of stablecoins which may herald a new era of sustainable investing.

Hedge Against Hyperinflation; The Stablecoin Way

At their core, stablecoins are a type of cryptocurrency whose prices are pegged to the price of a certain fiat currency. They maintain their price consistency by the way of collateralization i.e. backed by reserves of some sort. The reserves can be fiat currencies, other cryptocurrencies, or even commodities.

With more than $150 billion in market cap, stablecoins are the ideal step in the right direction. Their supply is beyond the control of any government which protects against the innate devaluation of money. Alongside, it can be used to conduct most financial transactions for a fraction of the cost, in a peer-to-peer manner, and with no regulatory oversight.

Now, how do we defeat hyperinflation using stablecoins?

In countries hit the worst by inflation, such as Nigeria, the currency devalues and decreases the population’s purchasing power if they hold their savings in them. Instead, they can convert the local currency, Nairas, into USDT or USDC or other fiat-pegged stablecoins. Their money wouldn’t have devalued due to the Nigerian inflation and more so would have had the potential to grow in value. Additionally, those dollar-backed stablecoins could be staked or used in DeFi protocols to earn more. While some countries suffering from hyperinflation and currency devaluation like Argentina choose to convert their pesos into Bitcoin, stablecoins offer a less volatile option to the number one cryptocurrency.

Stablecoins: The Messiah For The Unbanked and Underbanked

Despite the recent crisis surrounding the UST depeg and crash of the Terra ecosystem, stablecoins reflect the potential to truly democratize global finance. 3 of the top 10 most valuable cryptocurrencies are stablecoins — Tether, USDC and Binance USD. This provides everyone an equal chance to beat local currency volatility and hyperinflation.

The global unbanked population is growing and stablecoins act as a gate pass for them to join the decentralized global economy. When this unfolds, financial inclusion could finally be a reality.

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