Home > Blog > Can Cryptocurrencies protect against inflation?



trader
Scarcity makes the means of accumulation — gold or bitcoin — resistant to inflation. Therefore, bitcoin is often called “digital gold”. Its total number will not exceed 21 million coins, which gives it an advantage over fiat currencies, the issue of which is unlimited.

Other cryptocurrencies, for example, Ethereum, have a different mechanism of protection against inflation — burning. But this is not a new idea. In the traditional economy, there is such a thing as a stock buyback. Although buybacks and coin burning are not exactly the same thing, the concepts are very similar.

The crypto community has expanded significantly in recent years, and many of its participants have pinned their hopes on cryptocurrencies as a means to save their savings.

Experts of RBC Crypto told how realistic it is to protect yourself from inflation with the help of digital non-state currencies today.

Cryptocurrency, as a tool to protect against inflation, is used by many participants of the crypto market, in particular, institutional players, says Viktor Pershikov, a leading analyst at 8848 Invest.

“Taking into account the daily issue of cryptocurrencies already in circulation, the internal inflation of BTC and ETH is small (1.75% and 0.5% today), and cannot be compared with inflation in fiat currencies, which now reaches double-digit values. Therefore, for those market players who are looking for a cost—saving tool, cryptocurrency is the optimal tool for a long-term period of time,” Pershikov is sure.
Despite this, it is impossible to call bitcoin and other crypto assets optimal instruments against inflation, the expert stressed. He noted that there are difficulties in using cryptocurrencies, which reduce the demand for them as deflationary assets, namely:

High volatility of cryptocurrencies;
Lack of regulation;


Lack of reliable custodians.

“These and some other aspects limit the amount of funds that institutions are willing to place in cryptocurrency in order to protect them from inflation in fiat currencies. In other words, the risks of cryptocurrencies are too high to talk about the unambiguous use of digital assets as a tool against inflation,” the expert explained.
According to him, from the point of view of developing economies, cryptocurrency can be a tool to help save value. However, a significant drop in the rates of cryptocurrencies relative to USD (as well as relative to RUB) reduces the advantage of BTC and ETH as low-inflationary assets: as a result, a person will still go “to the cache”, and not stay in the crypt, and even if inflation does not eat his money, he will lose part of the assets against the background of falling capitalization of the crypto market, Pershikov warned.

“Thus, technologically cryptocurrencies are indeed a tool against inflation, but in reality there are a lot of “buts” of their similar application,” Viktor Pershikov concluded.
Senior Analyst BestChange.ru Nikita Zuborev added that in fact, it is quite difficult to protect yourself from inflation with the help of cryptocurrencies. The main property of a protective asset should be relatively low volatility, which no cryptocurrency project can boast of, except perhaps for stablecoins — hybrid assets.

“If we consider cryptocurrencies exclusively as long-term investments, then on average they can protect against inflation and even bring income significantly higher than traditional conservative stock market instruments. But still, this does not make them a protective asset. After all, for example, for investments shorter than two years, there are more time periods that would bring losses than profitable scenarios,” the expert explained.
He attributed this to the fact that any rapid growth in the capitalization of the crypto market is replaced by a prolonged deep correction. For example, from November 2021 to today, bitcoin has lost about half in price — about 56%, and the market on average is even more.

“Here are the stablecoins with their subsequent investment in various credit and investment DeFi protocols, directly or indirectly, can be called reliable protection against inflation. For example, centralized crypto exchanges as an intermediary allow you to earn about 10% per annum in foreign currency, which is very good by the standards of the traditional market,” the analyst said.
He added that if we consider investments directly in DeFi, then under certain conditions it is possible to achieve 50% or even more than 100% per annum, with different risks of investment strategies. But the main option here is to provide liquidity on decentralized exchanges.

According to Zuborev, it is worth considering that an asset used to protect against inflation should have good liquidity — that is, ease of conversion into the national currency and back. In modern realities, there have also been significant deterioration of conditions for investors from Russia in this direction — despite the fact that exchange methods continue to be available, various legislative initiatives within the country and Western sanctions have significantly reduced the number of available options, and the investment climate in Russia forces us to prepare only for the deterioration of the availability of cryptocurrencies for citizens, the expert warned.