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Crypto Clarified: Why is Crypto a Hedge for Inflation?

October 01, 2021

In this episode of Crypto Clarified, Head of Digital Assets Research Matthew Sigel explains inflation and why cryptocurrencies can be a hedge.

We should consider what inflation is, and how much of it we wants, and that’s a very different answer for each individual. It may help to start with some history. The Fed has a dual mandate to pursue maximum employment and stable prices. And that mandate was established in 1977 with the amendment of the Federal Reserve Act signed into law by Congress, and it’s interesting to measure how that mandate has evolved over time. In 1977 it cost $0.82 to buy dozen eggs and $0.13 for a first class stamp, today those prices are at least 5x higher, the average inflation rate since that 1977 law has been 3.4%. So does that count as stable? I think reasonable people can debate that, but a substantial portion of the population doesn’t think so, especially those who are trying to buy goods & services that everyone wants, like a college education, quality healthcare, organic eggs, equities – the prices of those goods have surged even faster, and contributed to wide levels of inequality that politicians are having a hard time sorting out. There’s also a good argument recent Fed policy of zero rates is actually exacerbating inflation by giving very low rates to banks that are deemed “too-big-to-fail”, by widening the 1977 “price and employment” mandate to include a period of “catch-up” inflation which the world is now confronting, that mandate to include climate change or race relations But these happen with no specific formula, behind closed doors.

And then we see a policy by a country like Italy, in late September who, in the face of these higher energy prices has now announced a 3 billion euro program to subsidize and cap surging energy prices with tax payer money, even as that same taxpayer money is used to force more constrictive ESG rules on the allocators of capital. It really speaks to a larger government role in setting prices, and the central bank’s unaccountability in deciding those rules.

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Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.

Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.

  • Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
  • An investment in cryptocurrency is not suitable or desirable for all investors.
  • Cryptocurrency has limited operating history or performance.
  • Fees and expenses associated with a cryptocurrency investment may be substantial.

There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.

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