When cryptocurrency was first introduced, it was meant to solve a multitude of problems that affected fiat currencies. Two of the key issues that digital currencies attempted to address were centralisation and inflation. But before we further delve into the topic, let's understand what inflation is.

What is inflation?

Inflation is an economic process that reduces the value of a fiat currency such as the dollar over a period of time. This is why the prices of goods and services continue to increase gradually. A McDonald's burger that cost you $1 a few decades ago is priced at $2 today. 

According to many economists, controlled inflation works in favour of the economy. Ideally, the inflation rate should be around 2% to encourage consumer consumption. However, the current trend of inflation has gone past the point where it is directly affecting the quality of life as their purchasing power has substantially reduced in a matter of months.

With rising inflation, not only consumers don’t have enough money to spend on essentials but property prices and investments also lose their value. As consumers experience inflation, they start to invest more in goods with recurring needs in anticipation which further drives demand and causes more inflation which has a negative impact on the economy.

This is one of the reasons why it has become important for people to explore and identify alternatives that can help them guard their money against inflation.

Cryptocurrencies hedge you against inflation

The money you currently have in your savings account is losing value much quicker than it used to. It means that you need to have a financial hedge against inflation. This is where investing in cryptocurrencies can help you out.

Investors and individuals who don't want their Euros and Dollars to erode have an alternative in the form of Bitcoin, Ethereum, Ripple, and many stablecoins. There are a number of ways digital currencies are protected against inflation.

Decentralised governance

Most fiat currencies are controlled and managed by the Federal Reserve banks through a tight monetary policy. This gives a single organisation a lot of influence over the fate of fiat currencies. On the other hand, cryptocurrencies are governed in a decentralised manner where a single organisation or individual cannot exercise undue or excessive influence over digital currencies.

Inherent scarcity

One of the reasons why fiat currencies fall victim to inflation is because there is no limit on minting new currency notes. Every time a bill or coin is created, the overall value of the fiat currency takes a hit. That's not the case with most cryptocurrencies as they have built artificial scarcity into the economic model with a cap on maximum supply. For instance, only 21 million BTC coins can be mined and the process becomes slower with time.

Insulated against uncertainty

Since most of the conventional asset classes such as stocks and commodities are governed and regulated by the states, social and political developments can have a major impact on their value. For example, during the COVID-19 pandemic, all financial markets crashed along with crypto but the digital currency market bounced back quickly to demonstrate its tenacity in the face of uncertainties.

Built-in predictability

Although predictable isn't what we generally associate with cryptocurrencies as they tend to be volatile, limited supply makes them predictable in different ways. You can always create new fiat currency bills and find new gold resources but the supply of BTC will still remain at 21 million tokens.

Not all cryptocurrencies protect against inflation

You have to keep in mind that while Bitcoin and many other digital currencies are built using an economic model that features restricted maximum supply and controlled circulation, not all crypto coins are created like that. Some cryptocurrencies don't have any cap on their maximum supply which means the blockchain can mint any number of coins.

Apart from that, stablecoins are also more likely to experience inflation as they are pegged to fiat currencies to counter volatility. As they are backed by a fiat currency reserve, it reduces day to day volatility but the stablecoin also loses value if the reserve currency does.

Having said that, it doesn't necessarily mean that investing in stablecoins to hedge against inflation is a poor choice. Many stablecoins provide you with a consistent interest-like income that can counter-act against inflationary pressure. This is why it is important to take different factors into account when investing in a stablecoin as a protective measure against inflation.

Final Word

There is no doubt that cryptocurrencies that have a cap on maximum supply are not prone to inflation and make for a good hedge against inflation. That being said, it is crucial to weigh the pros and cons of every investment and ensure that the net result enables you to gain value.

FAQ

How does Coinpanion work?
We help you to invest in the cryptocurrency market like a professional. Simply select a smart portfolio and get started straight away.

We help you to invest in the cryptocurrency market like a professional. Simply select a smart portfolio and get started straight away.

How much does Coinpanion charge?
If you invest in a portfolio (and not in a single cryptocurrency), a service fee of 2% per year is charged. The fees can be viewed at any time in your transaction history.

If you invest in a portfolio (and not in a single cryptocurrency), a service fee of 2% per year is charged. The fees can be viewed at any time in your transaction history.

Who can invest?
You need to be over 18 and live in a country that is part of the European Union or the European Economic Area (Switzerland, Liechtenstein, Norway, Iceland).

You need to be over 18 and live in a country that is part of the European Union or the European Economic Area (Switzerland, Liechtenstein, Norway, Iceland).

Can companies invest?
Yes, we already have several corporate clients. The minimum investment for corporate accounts is €25.000. Please send us a request to support@coinpanion.com and we will take care of it.

Yes, we already have a large number of corporate clients. The minimum investment for corporate accounts is €25.000. Please send us a request to support@coinpanion.com and we will help your company along the way.

What is the minimum deposit?
The minimum deposit is €50.

The minimum deposit is €50.

How long does it usually take for my transfer to arrive?
That depends on your bank. On average, a transfer takes 1-3 working days.

That depends on your bank. On average, a transfer takes 1-3 working days.

How can I set up a savings plan?
After you have transferred your first deposit, you can easily set up a savings plan in your dashboard. The minimum monthly investment is €10.

After you have transferred your first deposit, you can easily set up a savings plan in your dashboard. The minimum monthly investment is €10.

When will the start bonus or referral bonus be credited?
The start and referral bonus will be credited within 48 hours after receipt of payment.

The start and referral bonus will be credited within 48 hours after receipt of payment.

What happens to my deposits and withdrawals?
Deposits and withdrawals are carried out via third-party providers who take care of the purchase and custody of the cryptocurrencies. Coinpanion takes care of the rest.

Deposits and withdrawals are carried out via third-party providers who take care of the purchase and custody of the cryptocurrencies. Coinpanion takes care of the rest.

How can I deposit money?
We have several payment options for you. You can deposit money with your debit card, credit card and with a direct bank transfer.

We have several payment options for you. You can deposit money with your debit card, credit card and with a direct bank transfer.

How/when can I withdraw?
You can withdraw at any time on your dashboard.

You can withdraw at any time on your dashboard.

Is there a minimum term?
No, you can withdraw at any time.

No, you can withdraw at any time.

In which currencies can I withdraw?
Withdrawals are possible at any time and are currently exclusively in euros.

Withdrawals are possible at any time and are currently exclusively in euros.

What is the difference between the Coinpanion portfolios?
Each portfolio has a unique allocation. You can find out more here.

Each portfolio has a unique allocation. You can find out more here.

Which cryptocurrencies are included in the portfolios?
Coinpanion offers risk and theme-based portfolios. Depending on the portfolio you choose, other cryptocurrencies are included. Learn more about it here.

Coinpanion offers risk and theme-based portfolios. Depending on the portfolio you choose, other cryptocurrencies are included. Learn more about it here.

How is the trading of the portfolios handled?
The cryptocurrencies are traded according to the portfolio's underlying strategy. You can also adjust this via the settings. All cryptocurrencies are traded via third-party providers. You can find more information in the terms and conditions.

The cryptocurrencies are traded according to the portfolio's underlying strategy. You can also adjust this via the settings. All cryptocurrencies are traded via third-party providers. You can find more information in the terms and conditions.

Can I invest in more than one Portfolio?
Yes, you can invest in multiple portfolios at the same time.

Yes, you can invest in multiple portfolios at the same time.

How can I take care of the taxation?
Generally, taxation depends on the legal situation in your country. Coinpanion gives you the possibility to download all transactions directly on the platform. In addition, we have a partnership with the cryptocurrency tax company Blockpit. Through them, we can offer you a complete tax report. In cooperation with Blockpit, Coinpanion offers you a complete tax report free of charge for download.

Generally, taxation depends on the legal situation in your country. Coinpanion gives you the possibility to download all transactions directly on the platform. In addition, we have a partnership with the cryptocurrency tax company Blockpit. Through them, we can offer you a complete tax report. In cooperation with Blockpit, Coinpanion offers you a complete tax report free of charge for download.