Consumers and investors alike pay close attention any time a new announcement is made about the movements of the U.S. Consumer Price Index (CPI), which represents a reliable gauge on inflation or deflation. While consumers fret over the effect inflation has on their purchasing power in the here-and-now, investors are more concerned about how inflation will affect their purchasing power in the future.
During heightened periods of inflation, as the cost of goods and services begins to increase, faster than expected, investors will reassess their current strategy and portfolio allocation to ensure the long-term health of their investments. If a portfolio does not grow at a rate faster than the increasing cost of goods and services, that means it is actually losing value in real terms, as the purchasing power it represents is decreasing over time.
Ways That Investors Try To Make Their Portfolios Inflation-Proof
Adding Crypto As An Inflation-Proof Asset
Investors should be aware that capital gains from crypto are likely to be taxed similar to capital gains in other asset classes, although this depends on a person’s jurisdiction. Long-term capital gains are preferable to short-term capital gains, making it advisable for investors to seek out cryptocurrencies that they would be comfortable holding for the long term.
Opportunities For Low-Risk Yields In Crypto
It’s possible to earn yield in the digital asset space in a similar way to the yield previously offered by fixed-income products, as well as through low-risk yield opportunities. For example, over 8% per annum can be earned by lending out stablecoins, which are assets whose value is pegged to fiat currencies like the Dollar or Euro.
A feature of digital assets that is being used even more widely than lending is staking, a process by which assets are used to verify blockchain transactions and earn rewards for doing so. According to Staking Rewards, a data provider for staking and crypto-growth tools, over 70% of the supply of Cardano and Solana are being staked, and over 50% of the supply of Polkadot, Algorand, Binance Coin, and Avalanche.
Everyone Should Have The Same Access To Inflation-Proof Asset Options
With the U.S. CPI having increased beyond 5.4%, inflation is already here in a very real way. While the Federal Reserve maintains that this is a temporary state of inflation, the market is likely to begin to react to this new reality, if inflation does not fall in the near future, and certainly if it continues to rise. Investors who are not taking a look at the allocation of their asset portfolios may find themselves with a reduced future long-term spending power.
Currently, many traditional investors may find themselves shut out of the opportunities presented by cryptocurrencies and DeFi, as participation is still largely limited to those with significant technical savvy or knowledge of the crypto ecosystem. However, large swaths of the digital asset industry are working to remove barriers and improve access to these yield-bearing opportunities for anyone, regardless of technical skills.
Inflation doesn’t discriminate -- it affects the cost of goods for everyone, no matter what economic demographic they are in. Therefore, it’s important to enable the greatest number of investors at all levels to access the widest variety of high yield-bearing assets to safeguard themselves against inflation and maintain their purchasing power over the long term.
About Marius: Marius Smith is the Head of Business Development at Finoa, a European digital asset custody and financial services platforms for institutional investors and corporations. Prior to joining Finoa, Marius worked at N26 and Google.
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