Inflation is currently a hot topic, and it will probably be for the next 4-6 years. The Federal Reserve and Treasury Department printed a lot of cash that will slowly enter the money circulation.
I previously wrote a few articles about assets and inflation (royalties, dividends, rents, passive income), but today I wanted to focus on cryptocurrencies. We don’t know how crypto will handle itself against inflation because it is still in its infancy. But, as investors, it’s in our nature to make educated guesses, so let’s try to make some predictions.
Let’s start our journey with Bitcoin, the granddaddy of all cryptocurrencies. Many people equate Bitcoin to gold because of its scarcity. I understand this comparison and think it holds weight.
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Inflation happens when there’s too much money chasing too few assets. So, when there are scarce assets, the same dollars chase them, causing the prices to rise. This phenomenon just occurred during 2020-2021 in the US housing market.
Housing prices and rents went through the roof, and those who own real estate were the net winners. Luckily, I own three homes and caught this wave. In 2008, I was on the opposite end of the spectrum.
So, how will Bitcoin, a scarce asset, react to inflation? I believe that it will do exceptionally well against the backdrop of inflation. The first Bitcoin ETF was just approved, and El Salvador has officially started to use it as a national currency. Things are looking up for the young coin.
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The things you will hear about Bitcoin are “if it is a store of wealth” or “if it has intrinsic value?” Those are questions you have to understand yourself. After reading the book “Bitcoin: Hard Money You Can’t F*ck With,” I appreciate my investing thesis. I believe Bitcoin will go to $1 million eventually (20-25 years), but you have to read, digest, and create your thesis.
In the meantime, Voyager is paying me 5.75% interest (plus rewards) to hold my Bitcoin assets with them. That 5.75% will help beat inflation, which was around 5% during the summer of 2021. So with interest and capital gains, Bitcoin is earning its keep during this inflationary period.
Altcoins vs. Inflation. I spoke about Bitcoins first because where Bitcoin goes, Altcoins follow. I believe Altcoins will do just as well against inflation as Bitcoin. If you like to speculate, there is always a new coin that is about to pump.
If you don’t know what Altcoins to invest in, look at the interest chart above. You can’t go wrong with those coins because they are well-established. I am about to get into Polkadot because they will become a tremendous smart chain, plus the 12% interest.
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Cryptocurrencies vs. Cash. I think many people have lost faith in cash after all this money printing. We are due for a stock market crash in the next 2-4 years, so many people are starting to understand the concept of diversification. This will help cryptocurrencies rise with inflation.
In the article “Stocks vs. Bonds: Is 60/40 Still Effective?” I wrote that bond yields were too low to protect you against inflation. Crypto now presents livable interest rates, at least for now. However, I would not allocate 40% of my investment portfolio to crypto. I can understand how younger folks find this appealing, but that would be overkill.
I currently have 7% of my portfolio in cryptocurrencies, which will increase a little as I add Polkadot. With the stable coin USDC yielding 9%, there isn’t a need to hold more than $2,000-$4,000 in cash on hand.
Cryptocurrencies vs. Gold. Bitcoin and Gold will always be in some form of comparison. Call it old money versus new money. They are both scarce resources, so they merit a comparison. Gold costs money to store or brings physical risk to your home. Bitcoin floats in a digital wallet that can be compromised. They both carry some form of risk. Pick one, or even better, invest in both.
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Conclusion. I believe Bitcoin and Altcoins will outperform inflation. Centralized exchanges like Voyager are paying large amounts of interest to hold your crypto assets. You can curb inflation with interest alone; the capital gains will just be a bonus.
As we saw with the housing market in 2021, inflation affects assets. Yes, food and other commodities inflate, but assets such as real estate, stocks, and collectibles have reached extreme highs.
There has never been a better time to get into crypto. It is becoming a household name, and if you stay on centralized exchanges, your money is safe. I would be more concerned with holding cash versus holding cryptocurrencies when it comes to inflation.
Please follow me on Twitter and my Facebook Page for more investing knowledge. I love writing about cryptocurrencies, so we can all grow wealthy together. Enjoy and Happy Investing.
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