The “60/40 portfolio” has long been revered as a trusty guidepost for a moderate risk investor — a 60% allocation to equities with the intention of providing capital appreciation and a 40% allocation to fixed income to potentially offer income and risk mitigation.
Those traditional portfolios are getting destroyed on both sides simultaneously, for the first time in history. The traditional safe haven isn’t working this time around, which underscores the argument that “this time is different.” Bonds may be a deadweight allocation for portfolios from now on — or worse.
One potential way out is looking at new assets (and asset classes) that can guide the way into the future: once we pass defining historical moments, what was working before stops being true and new movements take root. Crypto is definitely one of those movements.
Still, even in a completely new market, any expert worth his salt would say that diversification is still the best inflation hedge.
However, in the cryptosphere, each cryptocurrency has developed its own particular solution to token inflation issues, depending on numerous factors.
The case for Bitcoin as a crypto hedge
Historically, cryptocurrency experts and investors deemed Bitcoin to be an inflation hedge asset due to its limited supply of 21 million and its speculative nature. Bitcoin’s value is, in theory, uncorrelated to the stock market, putting it in a category of investments known as “alts” (alternatives) alongside fine art, wine, and precious metals.
But lately, the crypto market has increasingly tracked the traditional market, especially the Nasdaq, suggesting that Bitcoin is actually correlated with stock markets and hence a poor inflation hedge.
Well, that depends on timeframes.
In order to establish historical relevance for correlation, we need both analysed markets to be in the same conditions (apple vs apple).
Look at gold, for instance: If you just decided to cherry pick points in time, certain data points throughout its history, sometimes you could look at gold and say it is an excellent inflation hedge — but you’d have to ignore all the times it simply wasn’t.
As you can see from the chart, depending on where you set start/end points for your analysis, different theses can be pursued and all valid within those parameters.
It is also fair to state that by zooming out, this logarithmic Bitcoin price chart is drawing a positive picture.
Crypto markets are still evolving and it will be very difficult to draw conclusions basing ourselves only on price dynamics and market data.
The only valid analytical way out is to look at fundamentals.
Our top 6 inflation-hedge cryptocurrencies
Following we hand-picked a list of tokens that should be in a diversified portfolio with high-inflation hedging properties.
- Bitcoin has already been analysed in detail in our first analysis on inflation and crypto.
To summarise: There is a limited fixed supply of Bitcoin at a cap of 21 million that, according to current projections, should be reached around the year 2140, as well as a Proof-of-Work (PoW) system rewarding physical activity done by hardware, that is progressively decreasing new Bitcoin emission.
- Ethereum has chosen a different path. Decentralised governance processes push the ecosystem to move from computational-heavy PoW to more lightweight consensus system, Proof of Stake (PoS) and to a token burning system that will algorithmically adapt to the market necessity; potentially creating a deflationary token without minting cap. Additionally, since ETH is consumed as gas for any DeFi transaction, transaction volumes can have a huge impact on ETH availability.
NFTs’ impact on Ethereum chain was immense and it still hasn't completely faded out. This was a market that didn’t exist and, thanks to innovation, was created out of nothing. Being that Ethereum is the most popular DeFi platform by far, any new innovation in the digital economy will land first here, granting ETH a competitive advantage against any other level 1 cryptocurrencies and potentially placing it into the group of inflation hedging assets.
- Albeit being pegged to fiat currencies, stablecoins (USDT, USDC, BUSD, EURT, etc…) could be seen as a potential hedge, given that investors can participate directly or indirectly in the minting process itself. Yielding stablecoins either on DeFi or CeFi (beware of the danger here!) can work as a more generalised hedge: works well against market volatility and also as inflation protection. Clearly yield rates should be analysed before embarking on this investment: peg mechanisms and collateralisation are very important factors here; see UST as a bad case.
Additionally, stablecoins are a quick shortcut into Forex markets and trading pairs; this factor should not be underestimated given that inflation has a powerful and quite predictable effect on safe haven currencies versus more risky ones.
- As previously mentioned, gold possesses some hedging quality and as such, deserves to be mentioned; hence his tokenised version - PAXGold - could find his place inside a diversified portfolio of crypto assets for inflation hedging.
PAXGold is the first gold-backed and fully regulated digital asset. It gives you the benefits of physically owning gold bars, but with the speed and liquidity of a digital asset, fractional ownership, and without the security risks of physically storing gold bars in your home safe or paying for storage at a vault.
Even though the price of gold can be volatile in the short term, historically it has always maintained its value over the long term. For this reason, many investors use it as a hedge against inflation, making it an investment worth considering.
- Binance coin (BNB) is one example of a deflationary currency: The Binance exchange platform burns BNB each quarter to reduce its supply until the token’s supply hits 100 million BNB, out of the initial 200M pre-minted. The inflation-hedging property here is that so long as demand remains consistent (a big hypothetical), the price of each individual coin will rise.
BNB relies on the Byzantine Fault Tolerance consensus method, where validators are involved, who earn the BNB tokens by verifying blocks on the network. It is similar to PoS but doesn't qualify as that method because all of the tokens have been pre-mined.
- Our solution to keep CHSB inflation proof, was to mint-and-forget 1B CHSB at birth and then apply different strategies - the latest being protect & choose - to incentivise token utility and keep our CHSB ecosystem healthy.
In addition to that, CHSB is the key to access all services already produced and those in production accessible via SwissBorg. In essence, the bigger the range of product offerings and new initiatives SwissBorg brings forth, the more and more utility CHSB will have, triggering an increased amount of it being locked into our platform.
The scarcity effect will, in turn, sustain a higher demand for CHSB, making it more valuable to yield those in our platform; which will send us to step 1 of this virtuous cycle.
We believe that our community-first approach will be proven safe and a smart choice to fight market instability and FIAT induced inflation.
In conclusion, if crypto really aspires to be Finance2.0, it clearly needs to learn from traditional finance mistakes and improve its model to better serve its final user: humankind.
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