• Contact Us
  • Affiliate Disclosure
  • Privacy Policy
  • Terms of Use
  • DMCA
Monday, January 30, 2023
WongaNews.com
  • Live Prices
  • Crypto News
  • Bitcoin
  • Altcoins
  • NFT News
  • Blockchain
  • Regulations
  • Trading
No Result
View All Result
  • Live Prices
  • Crypto News
  • Bitcoin
  • Altcoins
  • NFT News
  • Blockchain
  • Regulations
  • Trading
No Result
View All Result
WongaNews.com
No Result
View All Result

Crypto will become an inflation hedge — just not yet

August 27, 2022
in Regulations
Reading Time: 5 mins read
A A
ShareShareShareShareShare

Related articles

Code vs. Values: The Crypto Twist on ‘Trust’ – CoinDesk

January 30, 2023

White House Stance on Crypto Urges Roadblocks for Traditional Finance Firms

January 30, 2023

In theory, Bitcoin (BTC) should serve as a hedge against inflation. It’s easy to access, its supply is predictable, and central banks cannot arbitrarily manipulate it.

However, investors aren’t treating it that way. Instead, the cryptocurrency market is mirroring the stock market. Why is that? Let’s dive into what prevents cryptocurrencies from acting as a hedge against inflation, and what needs to happen to make them a hedge in the future.

Crypto could be a hedge, but it comes with inconveniences

Cryptocurrencies present a unique solution, given their lack of a central governing bank. You can’t lose trust in something that doesn’t exist. Its supply is finite, so it naturally appreciates 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 annual percentage yield is tied to the economic activity on the chain via its treasury and staking reward distribution mechanics. Those properties seem to address the cause of inflation in the traditional monetary systems — but some roadblocks remain.

Related: Inflation got you down? 5 ways to accumulate crypto with little to no cost

For starters, let’s examine the reasons why people invest in and hold cryptocurrencies. The majority of cryptocurrency holders see the future potential of those technologies, meaning some of their value is not currently present. They are speculative investments. Decentralization has been achieved by Bitcoin, but its exuberantly high energy costs remain unaddressed, and the majority of mining forces are still aggregated into a dozen mining pools. Ethereum has similar issues with energy consumption and mining pool centralization. Ethereum also has a security problem — more than $1.2 billion has already been stolen on its blockchain this year.

There’s also the issue of decentralized exchanges, or DEXs, which are currently not as fit for use as centralized exchanges. The DEX with the highest transaction volume, Uniswap, offers inefficient pricing compared with a centralized exchange. A simple trade of $1 million in Tether (USDT) for USD Coin (USDC) would cost over $30,000 more in fees and slippage than when executed on a centralized exchange.

These are technical problems that have solutions

Granted, these issues are being addressed. Several third-generation blockchains are tackling energy consumption and decentralization head-on. Privacy is improving. Crypto holders are beginning to accept that their wallets will always be fully traceable, which will prove enticing to new users who have previously been hesitant over blockchain’s hypertransparency. Projects seeking to merge traditional finance’s mathematical rigor with the native attributes of cryptocurrency are tackling the problem of DEX inefficiency.

Related: Ronin hackers transferred stolen funds from ETH to BTC and used sanctioned mixers

Mass adoption and integration need to happen before crypto can act as a bulwark against inflation. Crypto has characteristics of future value in an ecosystem that is currently struggling to establish its fundamentals. The crypto economy is still waiting for applications that will take full advantage of decentralization without sacrificing the quality and experience, which is especially important for widespread adoption. A payment system where each transaction costs $5 and the exchanged value is regularly lost will remain unfeasible.

Until the top cryptocurrencies can be used efficiently for real-world payments and decentralized applications provide a similar level of utility as centralized systems, crypto will continue to be treated as a growth stock.

Inflation is caused by a lack of trust — something crypto still needs

Inflation isn’t caused by just printing more money, which is to say that the presence of an asset doesn’t automatically cause its value to go down. Between September 2008 and November 2008, the number of billions of U.S. dollars in circulation tripled, yet inflation went down.

Inflation has much more to do with public distrust of the central monetary system. This lack of confidence — combined with corporate price gouging, the upheaval caused by pandemic relief packages and significant supply chain disruptions (accelerated, in part, by the war in Ukraine) — has landed us in the current crisis. The big money-print of 2021 didn’t cause inflation, but it magnified it.

Related: Has US inflation peaked? 5 things to know

In terms of presence, the supply of funds alone is not an overly significant issue for a store-of-value currency. What is stored is not necessarily part of the circulating supply. Gold, for example, exists in large volumes in the form of jewelry, bullion and so on, but in much smaller volumes on the commodity market. A market that took into account all the mined gold on earth would have a totally different price. Because this jewelry and bullion are not traded on the market at all, they do not affect the supply-and-demand curve. The same applies to currency.

Wow Year on year inflation in Europe in July. pic.twitter.com/VGWQ1OQOcB

— Arnaud Bertrand (@RnaudBertrand) August 27, 2022

Inflation is the result of a loss of trust that an asset is able to store its value over a long period of time. Most goods in this world are finite, so every party aware of the raised supply but unsure of the monetary policy will automatically factor it into their prices. Inflation becomes a self-fulfilling prophecy.

Crypto as an inflation hedge is possible, but not in the current climate

Cryptocurrencies fail as an inflation hedge during times of high volatility and market uncertainty. That said, they generally excel in steady growth environments where they easily outperform the market and where the relatively small market capitalization compared with fiat currencies plays in their favor as a growth stock. Current solutions to the problem of usability aren’t sustainable due to their speculation-based nature and low transaction volumes. The fall of financially unsound blockchains affects the entire ecosystem, which means that potential long-term solutions keep being derailed by scammers.

Related: Is Bitcoin really a hedge against inflation?

The more responsible and diligent the crypto community becomes, the more every sound protocol will benefit, and crypto will become a genuine hedge against inflation. Because cryptocurrencies currently follow growth stock patterns, they act as a good hedge against inflation during periods of stable growth but fail during times of financial crisis. As cryptocurrencies evolve, they’ll become an effective bulwark during these downturns too.

These days, it’s prudent to err on the side of caution when it comes to crypto investing during periods of market turmoil, and it would be unwise to use crypto as the only tool for shoring up investments against inflation. But this will shift as blockchain protocols continue to mature, and we’ll see an increase in the adoption and stability of cryptocurrencies as inflation hedges. The tools are already in place.

Jarek Hirniak is the founder and CEO of Generation Lambda and a certified quant with more than 20 years of software development experience. He spent six years working on trading systems at Citadel Securities and UBS, where he developed a series of novel trading systems and trading-related software platforms while leading multidisciplinary teams.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.


Credit: Source link

ShareTweetSendPinShare
Previous Post

The Top NFT Photographers of 2022

Next Post

This Week in Coins: Bitcoin, Ethereum Sink on Freaky Fed Friday

Related Posts

Code vs. Values: The Crypto Twist on ‘Trust’ – CoinDesk

January 30, 2023

Code vs. Values: The Crypto Twist on ‘Trust’  CoinDesk Credit: Source link

White House Stance on Crypto Urges Roadblocks for Traditional Finance Firms

January 30, 2023

Cryptocurrencies were dealt a blow last week after the White House called on Congress to do more to regulate the...

Four principles for crypto regulation

January 30, 2023

There was a substantial surge in the market capitalization of cryptocurrencies recently, reaching nearly $3 trillion in 2021 but collapsing...

Regulatory Climate Forcing Firms to Reconsider Crypto IPOs

January 30, 2023

Crypto prices are rebounding to start 2023, perhaps giving rise to a thaw in the crypto winters, but there’s still...

Singapore financial watchdog’s chairman questions if regulating crypto legitimizes speculation

January 30, 2023

Chairman of the Monetary Authority of Singapore (MAS), Tharman Shanmugaratnam, spoke at the WEF23 and stated a controversial take on...

Load More
Next Post

This Week in Coins: Bitcoin, Ethereum Sink on Freaky Fed Friday

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Recommended

Doodles Unveils Doodles 2 Details and Flow Expansion

January 25, 2023

IBA Announces Boxing Metaverse – NFT News Today

January 24, 2023
Whales find a liking for Shiba Inu [SHIB] but a burning issue prevails

Whales find a liking for Shiba Inu [SHIB] but a burning issue prevails

January 10, 2023

About Us

Wonga News is an online news portal that aims to provide the latest crypto news, blockchain, regulations, and much more stuff like that around the world. We promise to share only high quality content from the world's best crypto sources. Feel free to get in touch with us!

What’s New Here!

  • Twitter moving ahead with payment processing service; crypto integration may come later
  • Optimism Price Prediction – Further Upside Potential?
  • Slick Films Uses NFTs to Fundraise Documentary

Newsletter

Loading
  • Contact Us
  • Affiliate Disclosure
  • Privacy Policy
  • Terms of Use
  • DMCA

© 2022 WongaNews.com - All Rights Reserved!

No Result
View All Result
  • Live Prices
  • Crypto News
  • Bitcoin
  • Altcoins
  • NFT News
  • Blockchain
  • Regulations
  • Trading

© 2022 - WongaNews.com - All Rights Reserved!

  • bitcoinBitcoin(BTC)$22,768.00-4.28%
  • ethereumEthereum(ETH)$1,558.07-5.28%
  • USDEXUSDEX(USDEX)$1.07-0.47%
  • tetherTether(USDT)$1.000.05%
  • usd-coinUSD Coin(USDC)$1.000.14%
  • binancecoinBNB(BNB)$305.97-3.81%
  • rippleXRP(XRP)$0.395445-4.69%
  • binance-usdBinance USD(BUSD)$1.000.17%
  • cardanoCardano(ADA)$0.371358-6.07%
  • dogecoinDogecoin(DOGE)$0.087181-3.34%
  • matic-networkPolygon(MATIC)$1.08-7.57%
  • okbOKB(OKB)$37.24-6.27%
  • solanaSolana(SOL)$23.82-9.51%
  • staked-etherLido Staked Ether(STETH)$1,556.10-5.29%
  • polkadotPolkadot(DOT)$6.15-7.07%
  • shiba-inuShiba Inu(SHIB)$0.000011-5.21%
  • litecoinLitecoin(LTC)$90.45-6.73%
  • avalanche-2Avalanche(AVAX)$20.14-3.62%
  • tronTRON(TRX)$0.062384-2.58%
  • daiDai(DAI)$1.00-0.01%
  • uniswapUniswap(UNI)$6.43-7.32%
  • wrapped-bitcoinWrapped Bitcoin(WBTC)$22,712.00-4.53%
  • cosmosCosmos Hub(ATOM)$13.07-5.79%
  • chainlinkChainlink(LINK)$6.85-7.57%
  • leo-tokenLEO Token(LEO)$3.61-2.01%
  • ToncoinToncoin(TON)$2.27-7.69%
  • moneroMonero(XMR)$175.74-5.59%
  • ethereum-classicEthereum Classic(ETC)$21.27-6.19%
  • AptosAptos(APT)$17.23-4.14%
  • bitcoin-cashBitcoin Cash(BCH)$129.27-5.79%
  • Aerarium FiAerarium Fi(AERA)$7.12-13.06%
  • stellarStellar(XLM)$0.089552-4.49%
  • apecoinApeCoin(APE)$5.77-6.95%
  • quant-networkQuant(QNT)$139.28-8.70%
  • crypto-com-chainCronos(CRO)$0.077384-6.12%
  • nearNEAR Protocol(NEAR)$2.29-11.34%
  • filecoinFilecoin(FIL)$5.02-9.42%
  • algorandAlgorand(ALGO)$0.239803-8.65%
  • lido-daoLido DAO(LDO)$2.04-10.66%
  • vechainVeChain(VET)$0.023026-6.41%
  • internet-computerInternet Computer(ICP)$5.76-7.85%
  • hedera-hashgraphHedera(HBAR)$0.064074-8.08%
  • decentralandDecentraland(MANA)$0.73-7.68%
  • axie-infinityAxie Infinity(AXS)$10.71-12.08%
  • fantomFantom(FTM)$0.471004-4.38%
  • aaveAave(AAVE)$80.59-8.53%
  • the-sandboxThe Sandbox(SAND)$0.71-9.84%
  • eosEOS(EOS)$1.04-6.07%
  • elrond-erd-2MultiversX(EGLD)$41.97-7.13%
  • fraxFrax(FRAX)$1.000.01%