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By Jayasuriyan
Imagine it: reiterates the objective of the saver where you toil, save your income and build up your savings only to see your savings erode with the tide of inflation. This is an all too familiar feeling due to an economic term that people experience from time to time including myself, known as inflation. As the cost of goods and services rises, the value of your money decreases, leaving you with less purchasing power. But here is the burning question: can cryptocurrencies like Bitcoin and Ethereum come to their rescue as a shield against this financial erosion?
Here, in this article we are going to unfold the way these assets help to hedge against inflation. As operating beyond conventional financial systems, being revolutionary and utilizing blockchain mechanisms, having limited supply and decentralization, cryptocurrencies turn into them irresistible protectors against inflation.Â
What is Inflation?
Inflation is the process whereby the prices of products in the economy change over some period of time.
Essentially, inflation means that the purchasing power of money is lowered; any particular form of currency will buy fewer goods or services.
Inflation has many economic consequences for business and individuals, indeed for every country there are potential economic consequences of inflation. It can devalue money, bring changes and shifts in the central banking system and the overall spending by customers or businesses. Rupee values are translated quickly into cheaper prices reducing the future view and making things unpredictable. On the other hand, moderate inflation often implies the economy is growing healthy or growing at a healthy rate.
Types of Inflation and Their Causes:
This policy refers to the process in which inflation results from an excessive advancement of demand for products and services beyond the available supply. He opined that they mostly exist where the economy is on an upward trend.
- Cost push inflation: This type occurs when production costs increase and companies pass these costs on to consumers in the form of higher prices.
- Built-in inflation: Also known as price and wage inflation, it is due to the expectation of workers that they must continue to increase their wages to cope with the rising cost of living, leading to a cycle in which wages and prices chase each other upwards.
- Monetary inflation: Originated from a volumetric rising in the money supply that is above the growth in the economy, this results in a fall in the purchasing power of the money or in other words the value of the currency drops and there is an in turn rise in the general price level.
- Hyperinflation: A very rapid and acute inflation where both prices and rates are high; this is usually the end-point of rampant monetary inflation and currency depreciation.
Each type of inflation has different causes and can affect your investments in different ways. Knowing these categories will help you decide how to protect and grow your investments when the economy changes.
Effects of Inflation on Traditional Investments
Inflation is a critical factor that can significantly affect your investment portfolio. Financial assets respond in various ways to inflation, and understanding this is crucial for managing your investments well.
Investment finance can also respond differently to inflation, and this guide can help us understand the manner in order to do a good job managing our investments.
- Stocks: Inflation is in general detrimental to stock investments but at the same time can have positive effects in some cases. It can contribute to high revenues because of high end prices, and at the same can harm profits due to high costs, and low consumption among customers. Earnings also increase when there is moderate inflation, but decrease when there is high inflation rate on stock.
- Bonds: In general, bonds are considered to be inflation-sensitive investments. When inflation goes up, the real value of bond payments at a fixed interest rate falls and thus leads to a decrease in the price of the bonds. This inverse relationship makes bonds, especially long term bonds, to be of high risk especially in an inflationary environment.
- Real Estate: As for real estate, it quite regularly became the inflation hedge. Property assets and rental income is known to appreciate with effect from inflation hence investing in property could be more beneficial in inflationary eras.
Individuals may benefit from inflation; specifically, commodities like gold and oil may be favorable. These assets are used as a container for value that can provide against the deterioration of the purchasing power of the currency in inflation.
Relationship Between Inflation and Interest Rates:
If the level of inflation is high a central bank will usually raise the interest rate. By raising interest rates, there is increased monetary cost of borrowing which has an impact on consumersâ expenditures and corporate investments.
Interest rates are important to the investors in the sense that when interest rates rise by the market, this will mean higher yields on new bonds for investors, but similarly it means that the value of bonds in the market will decrease. Moreover, higher interest rates slow down the business growth, however this might be expected to deter the profitability of the stock market.
To stay ahead in investments, monitor inflation indicators such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) for price trends, stay up to date with credible Monitor economic news and forecasts, as well as central bank measures affecting inflation and market movements. Knowledge of how changes of inflation and interest rates do impact on different asset classes go a long way in assisting one to make the right decision on where to invest.
Cryptocurrencies are similar to the money that most people use in their everyday lives, with a key difference of the fact that they exist only in the digital space. They do not have any central authority which provides or supervises them like the government or banks.
Which is grounded on some exciting piece of architecture known as the blockchain. Also envision it as a highly and deeply encrypted electronic record of all the transactions that exist in the world today in their most transparent and easily accessible states.
That means it might be helpful if you asked the somewhat silly question that many of my readers have asked: âWhatâs the problem?â How can these digital currencies assist me in escaping the talons of inflation? Let's analyze why they are such effective shields
- Limited supply and scarcity: Most cryptocurrenciedes have a limit that cannot be exceeded in contrast to other forms of traditional, printed or physical currency. This rarity is a testament to the fact that as demand for cryptocurrencies is determined, their prices are also bound to skyrocket, making it perfect as an inflation hedge.
- Decentralization: Since it lacks a central authority and regulating body, cryptocurrencies are decentralized in nature. If your assets get manipulated or interfered with by outside forces, decentralization shields them from all the malicious endeavors.
- Portability and accessibility: It also points at the fact that cryptocurrencies are easy to store in digital wallets which are mobility and portability in storing wealth.
How to Integrate Cryptocurrencies Into Your Portfolio?
Including cryptocurrencies in your investment mix can diversify and grow your portfolio, but it's crucial to know how to handle this dynamic and volatile asset class:
Start by clarifying your investment objectives. Are you looking to preserve your long-term wealth, short-term gains, or a combination of both? Learn more about the importance of setting financial goals in our article â The Power of Setting Financial Goals: Why It's Essential to Your Money Success .â
Establish a disciplined strategy:
Buying and holding (HODLing) means acquiring cryptocurrencies for the long term, with the belief in their potential, and withstanding market fluctuations. Learn how to buy cryptocurrencies on Kriptomat in our step-by-step guide:Â
Dollar-Cost Averaging (DCA) is a disciplined strategy that involves regular fixed investments, regardless of cryptocurrency prices.
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Author Bio:
Jayasuriyan is a Digital Marketing Executive at BlockchainX, a leading Web3 development company. With extensive experience in the blockchain industry, Jayasuriyan is passionate about leveraging innovative marketing strategies to drive growth and engagement in the Web3 space. Connect with him to explore the latest trends and opportunities in blockchain technology.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.