Best Cryptocurrencies To Hedge Against Inflation

Want to jump straight to the answer? Passive income is often a great hedge against inflation and crypto staking on Midas.Investments offers some of the best interest rates on the market.

Inflation is an almost innate problem with any kind of physical currency. It even existed before the invention of paper money. Multiple Roman emperors famously debased their coins with less precious metals to cover its enormous military expenditure. There were essentially no decent solutions to this problem then and the problem persisted even through the 20th century, causing untold levels of suffering. Cryptocurrencies may be the best hedge against inflation discovered so far.

The United States dollar (USD) is the most influential currency in the world. In 1944, the world's developed nations met in Bretton Woods, New Hampshire, to regulate the international monetary system. At the time, the U.S. controlled 2/3 of the world's gold and convinced the Bretton Woods agreement to back international trade with gold and the USD.

In 1971, after the U.S. couldn't pay back the other countries in gold, the USD was separated from its gold backing and became a fiat currency backed by the U.S. government. After this, many currencies followed suit, but the U.S dollar mostly remained as the world's reserve currency.

Fast forward to today, where a global pandemic has sent the world economy into the worst recession since WWII. In response, many governments, especially the U.S., have taken on immense debt to stimulate the economy in an effort to not fall into an economic standstill. About $4 trillion was pumped into the U.S. economy and its debt rose to $28 trillion, which is 28% more than the national gross domestic product (GDP). 

During 2020, the global debt increased by $24 trillion to hit an all-time high of $281 trillion, which is over 3.5 times the global GDP. On top of this debt imbalance, raw materials, computer parts and shipping have all run into trouble and have become very expensive, making products using these materials more costly.

The toxic inflationary rates and debt to GDP ratios are teetering on full-out financial crises. After the recent crypto boom, many of the world's largest banks are frantically looking into cryptocurrencies as the next best way to secure their money and hedge against inflation. As history has shown, the banks shouldn't be the only ones worried about their savings.

You don't need to be a bank or fancy hedge fund to learn how to use cryptocurrency to secure your savings from the misfortunes of greed and insecurity of governments and banks.

What is Cryptocurrency?

Cryptocurrencies are units of currency secured by distributed ledgers, most commonly through blockchain technology. The 1st cryptocurrency was bitcoin, which serves as digital gold thanks to its wide acceptance and finite scarcity. The idea of Bitcoin was born out of the 2008 financial crisis and it was aimed at battling the issues caused by being forced to transact with a centralized third party. Inflation is one of many of these problems, even though the Bitcoin whitepaper doesn't explicitly say it could be used as a hedge against inflation. Its creator likely didn't expect it to become as large as it did, which enabled it to be one of the best cryptocurrencies for hedging against inflation. Other cryptocurrencies have (debatably) improved on bitcoin's model, such as Ethereum with smart contracts and Solana with proof of stake.

What Kinds of Cryptocurrency Can Be Inflation Hedges?

Many cryptocurrencies have a limited supply that can't be changed, similar to precious metals. With the innovation of advanced crypto-financial functions beyond the storage of value also comes unique ways to use your savings.

Staking, yield farming and lending platforms are fast-growing crypto industries that allow you to put forward your coins to provide crypto services that can passively grow your savings. Some currencies burn coins as they are transacted to deflate its supply and incentivize holding coins. All of these functions come at different risks that should be taken into account when constructing a strong crypto portfolio.

Since the blockchain industry is still relatively new, cryptocurrency prices can be quite volatile. While this may not be a great way to store value over the short-term, if demand continues to increase for cryptocurrency, prices will continue to rise over the long-term. Since the economics of a coin are written in code and deployed on the blockchain, no entity can decide to print more bitcoin in the future.

The best cryptocurrencies you can use to hedge against inflation are coins with limited supply and strong adoption. The 2 best cryptocurrencies to use as a hedge against inflation are likely Bitcoin and Ethereum.

Best Cryptocurrencies to Hedge Against Inflation

Bitcoin (BTC)

Bitcoin is the original cryptocurrency and also the largest by market capitalization. It was created by an anonymous person or group that goes by the pseudonym, Satoshi Nakamoto. The network is governed by a locked-in code that nobody controls. Bitcoin is an inflationary coin with a total supply that increases at a rate which is slowed down by 50% approximately every 4 years. 

However, the total supply is capped at 21 million coins, which will probably be reached in 2140. When the final amount of coins is reached, no more will be minted no matter what happens. The consistent low inflation rate and large market cap makes bitcoin easily a favorable currency to hedge against inflation. 

Ethereum (ETH)

Ethereum is a network that hosts smart contracts and decentralized applications. The functionality that this network hosts allows for new and innovative fintech solutions to be developed and run on Ethereum's blockchain. 

This is currently a proof of work (PoW) network but the platform has been planning to fork over to a proof of stake (PoS) network since its inception. It recently implemented a new transaction pricing model called EIP1559, which is expected to go live on August 4, 2021. This model is extremely important in making Ethereum one of the best cryptocurrencies to hedge against inflation.

This mechanism will make gas fees more predictable and burn a base fee to balance its inflation rate. Unlike bitcoin and many other cryptocurrencies, Ethereum doesn't have a supply cap. It does, however, have an inflation cap at 18 million new coins per year and a fixed inflation rate that issues 5 new coins for every block mined. Currently, new coin supply is driven by transaction volume.

But, with the upcoming hard fork to PoS, Ethereum doesn't need to compensate its miners' electricity cost with as many new coins to keep them profitable. So, the new issuance protocol will likely not create nearly as many coins, and with the EIP1559 burning, Ethereum could likely have a negative net issuance. This could make Ethereum a net-deflationary currency which means its supply is actually shrinking instead of constantly increasing. A deflationary cryptocurrency is the best for hedging against inflation because it should have the opposite effect. Instead of losing value it should rise in value. Deflationary currencies are not great for some things, especially lending, so it likely can't be the main medium exchange but it can still be a fantastic cryptocurrency to hedge against inflation.

Binance Coin (BNB)

Binance is the world's largest cryptocurrency exchange and hosts a wide variety of trading functionalities. Its BNB originally started on the Ethereum network as a ERC-20 token but was transferred to Binance's own proof of stake authority (PoSA) network called the Binance smart chain.

It has a maximum supply of 170,532,785 coins, of which over 90% is already in circulation. Binance also burns BNB every quarter through buybacks using Binance's operational profit and BNB reserves. This burning will continue to happen until 100,000,000 coins are burnt, which is expected to take 6 to 8 more years. Last year BNB burnt so many coins the overall market was deflationary by 7.16%. This makes it one of the best cryptocurrencies to hedge against inflation.

EOS (EOS)

Blockchain development is complicated. It's hard for projects that could benefit from blockchain technology to actually use it because it takes a lot of time and computer science knowledge to set up. 

EOS focuses on making the process of using blockchain technology as simple and straightforward as possible. Its network uses a delegated proof-of-stake (dPoS) consensus mechanism, which uses delegates for its governing protocol. There is a total supply of 1.02 billion tokens and 954 million currently in circulation. EOS also burns coins if the community passes a proposal to do so. 

In 2020 they burned about $132 million in EOS tokens to curb inflation, deflating their supply by the end of the year by 0.8%. Again, this could make it a great cryptocurrency for hedging against inflation.

New Economy Movement (NEM)

NEM stands for New Economy Movement and is the first proof of the importance of blockchain to efficiently host transactions. It's a fairly unique project from the rest of the crypto market because it doesn't use miners and has a centralized blockchain.

The parent company, NEM Group, is heavily focused on helping new projects use the platform through its NEM Ignite Incubator Program. NEM may be a good hedge against inflation as it doesn't issue new tokens. Instead, when it first released the network, the total supply of 8.999 billion coins was distributed.

Where to Buy Cryptocurrency

Thankfully, there are plenty of ways to purchase cryptocurrency. Some things to consider when making an account with a trading platform are the platform's security, altcoin offerings, user interface and payment options. Some great choices for U.S investors are Coinbase, eToro and Interactive Brokers. Interactive Brokers has the lowest fees, but Coinbase may have the best user interface for beginners. If you're looking for plenty of altcoin offerings and advanced trading features, then eToro may be your best bet.

U.S based exchanges are the most trusted centralized place to buy cryptocurrencies because they hold accountability in U.S. courts. Remember, this could change at any time due to the crypto upheaval of 2022 and 2023. You should plan to be flexible, use a secure wallet and move your assets when needed.

How to Store Crypto Safely 

With centralized exchanges, you don't actually own the crypto yourself. Instead, the exchange holds the crypto on your behalf, which is why exchange insurance is important. Crypto wallets are used to store the crypto that you fully own. Software wallets let you store your crypto with an online storage service that lets you access your account from wherever you are. Online remote access, however, can be an avenue for hackers to break into your account. 

To eliminate the risk of online hacks, hardware wallets are physical storage devices that let you hold your crypto offline. Each holder values the pros and cons for the methods of storage differently depending on who they are as a buyer.

Best Software Wallet: ZenGo Wallet

ZenGo markets itself as the 1st keyless cryptocurrency wallet. The platform offers a secure and easy to use storage solution for your cryptocurrencies, including Bitcoin, Ethereum, and ERC-20 tokens. Plus, the wallet has a mobile app to easily manage your portfolio on the go. While most crypto wallets don't let you trade crypto without 1st sending your funds to an exchange, ZenGo lets you trade directly from its mobile app.

Best Hardware Wallet: Ledger Nano X

The Ledger Nano X is a popular hardware wallet that provides optimal security and an easy-to-use interface. The small USB device can be accessed on all operating systems and stored with very little space. Its app connects to the device over Bluetooth, where you can control your wallet from a computer or smartphone.  

Best for both: Ellipal Titan

The Ellipal Titan is a cold storage wallet that is completely sealed up to ensure its physical safety and ultimate hack proof reliability. The device can’t connect to the internet in any way and doesn't have connection ports to make it waterproof and impact resistant. It supports 40 blockchains and over 1,000 different tokens, which makes it a very versatile wallet. 

Buying Cryptocurrency vs. Holding Cash

The U.S. dollar has been the backbone of commercial transactions for a long time. It is legal tender that can be transacted to cover liabilities. The ability to be readily accessed to cover expenses is why it's considered a very liquid asset. Because of this liquidity having the U.S. dollar as an asset is beneficial because of its potential to be used on demand. However, because of inflation, this liquidity value goes down the longer it is held. The recent imbalances with inflation and debt can create a domino effect of defaults and bankruptcies that disrupt economic growth and hurt the dollar even more.

On the other hand, crypto isn't as big of a liquid asset as the U.S. dollar but is constantly growing and slowly becoming more liquid through adoption. The crypto market is continuously taking steps to improve its usability and make financial services more efficient. One of its biggest downsides to using cryptocurrency is how fast its price swings. 

The market size of cryptocurrencies is heavily affected by influxes of $1 billion, which adds a level of risk to it as an asset. Its small market instability is also what gives it the potential to increase in value as there is still plenty of room to grow. The reliability of these automated blockchain networks and the potential for its market to grow is what gives it an advantage over an inflated U.S. dollar.