Cryptocurrency as a Hedge Against Currency Devaluation

Learn if and how cryptocurrency can protect your savings from inflation.

In a globalized economy, events taking place in one country can affect the rest of the world. That’s why the governments of most countries strive to keep a balance of international economic conditions to incentivize trade and investment. One of the ways governments sometimes use to maintain such a balance is “currency devaluation.”

What is currency devaluation in the first place? Is it beneficial for the economy of a country? Does it have any negative effects? And if so, how can investors protect themselves against those effects? What role does cryptocurrency play in currency devaluation? In this article, we aim to answer all these questions.

Currency Devaluation

Many years ago, the currencies of many countries used to adhere to a so-called “gold standard.” Currencies were backed by gold, including the US dollar. There was regulated convertibility of US dollars into gold. At the beginning of the 20th century, an ounce of this precious metal was equivalent to $20.67. Later, by the middle of the 1930s decade, the price was adjusted to $35 per ounce as a result of the United States being taken off the standard.

During the presidency of Richard Nixon (1969-1974), the gold standard was completely abandoned. The price of gold increased dramatically as a result. One of the major economic consequences was that world currencies could float freely against each other. They were no longer regulated by any standard. This change opened the possibility for governments to adjust currency exchange rates as deemed more convenient. One of these adjustments is currency devaluation, which consists of the deliberate reduction of the value of a country’s currency.

Why Do Some Governments Opt for Currency Devaluation?

Contrary to what the majority of people think, a strong currency is not always the best alternative for the economy of a country. Since goods and services would be more expensive for foreigners, a country with a strong currency could have problems attracting foreign investment. The purchasing power of the local population would be greater abroad, but that would not help much to make the country more economically competitive.

However, if foreign investors could see the country as being cost-effective for doing business, there would be an inflow of capital into the country’s economy. The result would be the creation of new jobs, more exports, and general economic growth.

Does Currency Devaluation Have Negative Effects?

Although currency devaluation can help the economy of a country, it can also create some negative effects. The most common negative consequence of currency devaluation is inflation. With a weaker currency, imported goods become more expensive. As a result, end consumers would increase the demand for locally produced products and services. But if the supply of local producers doesn’t meet the growing demand, the prices of local products and services would also increase.

Moreover, currency devaluation tarnishes the image of the country’s economy. While devaluation attracts foreign investment, it also raises doubts about the strength of the nation’s economy. If the currency is repeatedly devalued, foreign investors may lose confidence in the country and its capacity to achieve real economic growth. Further, foreign debt holders may have losses because of the need to exchange payments in a devalued currency. In the end, the effect could be the opposite of what originally was intended for.

Traditional Hedges against Currency Devaluation

For national investors, currency devaluations create uncertainty about the future of their holdings. Therefore, over the years, investors have used different assets and commodities to hedge their investments against inflation and other negative effects. Which hedges have worked best? The list below summarizes the best hedges against devaluations.

Precious metals. Historically, gold and silver have always held their value during economic turmoil. These commodities are considered some of the best hedges against inflation. Therefore, investors usually keep physical reserves of these precious metals in bars of bullion coins.
Exchange-traded funds (ETFs). Since holding a large number of bars of bullion coins is not practical, investors often turn to ETFs. There are ETFs for gold and silver, respectively. The fund itself physically holds precious metals, whereas the investors get derivative contracts backed by silver or gold. Storing a piece of paper is always easier than holding metal bars at home.
Commodities. One of the most effective ways to hedge investments against inflation is through acquiring commodities. Metals, oil and energy, livestock, and agricultural products are some of the most common hedges. The prices of these commodities usually follow inflation, thereby protecting the value of investments. These commodities are traded as contracts, options, or ETFs.
Real estate. Land and property are physical assets that generally keep their value during inflation. What’s more, these assets can increase their value over time and give returns to the investor. If the owner chooses to rent or lease their real estate, extra income can be generated.

Cryptocurrency as a New Hedge against Currency Devaluation

With the release of Bitcoin in 2009, a new type of asset came into existence: cryptocurrency. In the last years, Bitcoin and other cryptocurrencies have been gaining acceptance as hedges against the catastrophic effects of currency devaluation. Bitcoin is often referred to as the “digital gold” because of its ability to store value. Owing to its scarcity (a maximum supply of 21 million digital coins), the price of Bitcoin will only increase as all the coins are in circulation.

Moreover, Bitcoin has high liquidity. It can be easily sold on many exchanges that are available 24/7. Also, the number of online and brick-and-mortar businesses that accept Bitcoin is continuously increasing. Other cryptocurrencies like Ethereum are considered effective hedges against inflation too.

The best way to protect your investment using cryptocurrency is to diversify your portfolio of crypto holdings. You can diversify by using an instant exchange service like LetsExchange.io, which lists over 350 digital coins and tokens. You can buy and sell cryptocurrencies on our platform without experiencing any liquidity problems. It is easy, secure, and reliable.

Can It Work Out?

Some cryptocurrencies have demonstrated their enormous potential to function as hedges against inflation and other negative effects of currency devaluation. To be on the safe side, they should be used in combination with traditional hedges. Ultimately, there is no perfect protection against devaluation and its effects. Cryptocurrencies are still in their nascent stage. Although the industry is promising and is developing quickly, cryptocurrencies are still highly volatile and unpredictable. Therefore, you should thoroughly research any digital coin you want to add to your financial portfolio.

Disclaimer

Please keep in mind that the above information is based exclusively on our observations and is provided for informational purposes only. It doesn’t constitute any kind of financial advice nor represents an official forecast. Cryptocurrency is a highly volatile asset, and you are investing in it at your own risk.

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