Synopsis: This article explores whether cryptocurrencies can be used like gold and real estate to protect ourselves from inflation. Read on to understand inflation, inflation hedging, and the pros and cons of using cryptocurrency as an inflation hedge in India.
In India, most people have difficulties buying goods and services for their needs and wants. This arises due to inflation, which accounts for 5.22% in December 2024. Inflation refers to the decrease in the purchasing power of an individual due to rise in prices of goods and services.
It is necessary for people to buy an instrument, which is powerful enough to hedge against inflation. A hedge can only occur when there is a negative correlation between two assets. Many people find gold or land as better safe haven assets that can hedge against inflation in India, as fewer common people enter the stock market.
An inflation hedge is an instrument that maintains its value even after accounting for inflation. This helps people protect themselves from inflation. Many people from Venezuela and Argentina look forward to buying Bitcoin when inflation gets higher or when the currency loses its value. There are many people in high-inflation countries, who buy stablecoins for daily use.
What should be the criteria of an asset to be considered a “good hedge against inflation”?
- The value of the asset rises more than or equal to inflation.
- The price of the asset, which has limited supply, rises during periods of high inflation.
- The sellers can increase the price of this asset without losing customers.
- The asset is easy to buy or sell quickly.
- If the asset does not correlate with traditional stocks or bonds, then it can be included as it has diversification potential.
Can cryptocurrencies be considered as a hedge against inflation?
- Many studies suggest that BTC rises after inflation shocks.
- Many institutional investors adopt it as a potential hedge in financial portfolios.
- Some people from other countries use it as a hedge against inflation.
Why It May Not Work?
- Cryptocurrencies are very volatile in nature. This makes them behave like speculative assets.
- Gold can be considered a safe haven as prices tend to go up when markets fall. The prices of gold are aligned with inflation. This makes gold a safe haven asset, whereas cryptocurrencies are unpredictable.
- There is long term potential for cryptocurrencies to increase in value, but there is a short term uncertainty as well.
While cryptocurrencies show promise as an inflation hedge in certain global contexts, Indian investors should approach them with caution. The extreme volatility and unpredictability of crypto assets make them unreliable for short-term protection against inflation.
Traditional assets like gold and real estate remain more stable options for Indian households seeking to preserve purchasing power. However, for those with higher risk tolerance and a long-term investment horizon, cryptocurrencies could serve as a small portion of a diversified portfolio rather than a primary inflation hedge.
Written by Parvati Anilkumar
