Cryptocurrencies: the digital alternative to gold?

For Mayor Scott Conger of the city of Jackson, Tennessee, there is only one solution to the inflation problem in his country. He recently announced on Twitter: “Why do we accept inflation? Why don’t we ask more of our federal government? 6.3% in 2 years. 172.8% in my lifetime. Every year our dollar is worth less. There is no turning back. There is only one solution to this problem. #Bitcoin “. A guest contribution by Dr. Julian Hosp
Now, with the help of a blockchain task force, Conger wants to look for ways the city can accept Bitcoin payments. The stated goal: Jackson’s residents should be able to pay property taxes in Bitcoin in the future, for example. Like Mayor Conger, many banks, especially in the USA, have given up their previous critical stance on cryptocurrencies and are increasingly entering the digital currency business.

In light of ongoing inflation concerns, the question of the right portfolio strategy is becoming more and more urgent for investors. Do cryptocurrencies really protect against inflation in times of rising prices, as a digital alternative to real assets such as stocks, real estate or gold?

Rely on solid projects with a track record such as Bitcoin or DeFiChain

In general, a clear distinction must be made here from the large crypto projects with tangible areas of application and those projects that were founded out of joke and frenzy – so-called meme projects. Solid projects like Bitcoin or DeFiChain with a track record are much safer and less risky than meme projects like Shiba Inu or the countless recently founded projects.
Bitcoin, in particular, as the oldest and most liquid of all cryptocurrencies, is also very suitable for protecting against inflation. With Bitcoin, for example, there is an inherent limit of coins that cannot be exceeded. The programming code ensures a shortage of supply and forbids ever more than 21 million Bitcoin to exist. With a maximum of 21 million units, Bitcoin is even scarcer than gold.

The evidence for Bitcoin as an inflation currency is still pending

Possible risks associated with an investment in cryptocurrencies should nevertheless be considered. Bitcoin, for example, has only existed as the oldest crypto currency since 2009. In its history, there has not yet been a phase of really high inflation, at least in one of the major economies. The evidence for the cryptocurrency as an inflation currency has not yet been provided. Nevertheless, Bitcoin has had to go through several highly volatile cycles since its inception. It is therefore legitimate to view Bitcoin as a long-term protection against a fall in prices, since it has come back stronger than before after each fall in prices.

This can also be seen in the adoption rates in countries such as Argentina, Venezuela and Lebanon, which have recently been plagued by escalating inflation. One should also bear in mind that the highest Bitcoin sales in Lebanon were made at the peak of the economic and currency crisis there last year, which can be seen as a strong signal in favor of inflation protection. Nevertheless, cryptocurrencies are and will remain a young asset class, which are also very susceptible to fluctuations due to the still rather manageable adoption rates among institutional (financial) investors.
Investors of all ages should diversify.

Anyone who wants to invest in cryptocurrencies should be aware of the price fluctuations that occur and the associated risk. For a 20-30 year old investor, it is definitely worth jumping on the Bitcoin bandwagon. However, a long-term investment horizon should always be aimed for, as well as the maxim never to put all of your assets on one horse. Small amounts that you can save away from your salary are quite acceptable, but the entire future provision should never be put on the crypto card. However, investors of all ages should diversify. Smaller investments in solid and well-known projects can make sense even in retirement from the perspective of a balanced portfolio.
It is advisable to trust providers who rely on transparency as far as possible. It should be clear what you are buying and what you are getting for your money. Also of interest here are the upcoming offers on the subject of “decentralized finance” and the new investment products that come with it. For example, online platforms such as Cake DeFi offer interesting opportunities to generate passive income and to participate in the Bitcoin price development.