From Hyperinflation to Crypto: How to Preserve Wealth in an Era of Asset Bubbles and Fragile Economies

Original title: "From Hyperinflation to Crypto: The Search for Wealth Preservation in an Era of Asset Bubbles & Crippling Economies"

Original author: Ruben Merre, Co-founder and CEO of NGRAVE< /blockquote>

Original compilation: Rhythm 0x49

 

 

Several countries around the world are suffering from hyperinflation and soaring unemployment. This leaves people with no choice but to abandon their national currency and look for other ways, platforms, assets to help them preserve their wealth.

 

This article considers three possible asset classes as potential safe havens: gold, stocks and cryptocurrencies.

 

Although gold is typically a good asset to hedge against inflation, its investment performance has been tepid over the past decade fire. Stock market indices are at record highs, with economies facing some headwinds in the fight against COVID-19. When it comes to cryptocurrencies and the encrypted world, most people in society have a bad impression: unsafe, unstable, and untrustworthy. Negative headlines about cryptocurrency price crashes, financial losses, hacks and criminal involvement have cast a gray shadow on the cryptocurrency's reputation.

 

However, residents of countries with high inflation rates seem to be flocking to this relatively new asset class in search of wealth preservation . This article outlines some of the issues facing the aforementioned countries and their people, potential safe haven assets, the rationale behind cryptocurrency-based solutions, and important considerations to make when considering crypto wallets.

 

Bloomberg Misery Index: When Hyperinflation and Unemployment Soar

 

In 2014, Venezuela’s inflation rate reached 69%, the highest in the world. In the ensuing years, the country continued to set new records, and the hyperinflation rate soared year by year, reaching a staggering 1,700,000% in 2018. At the time, the Venezuelan government decided to stop publishing official inflation rates. That’s why Bloomberg launched the “Cafe Con Leche Index,” which tracks just one thing: the price of a cup of coffee in Venezuela. Although not as complex as the traditional consumer price index, Bloomberg believes that it has the advantage of being tangible and regularly tracked. Given that it monitors products that Venezuelans consume every day, it provides an up-close look at inflation in the country.

 

The Bloomberg Misery Index, the latest version of the Arthur Okun Misery Index, measures unemployment The rate and inflation rate are scored against the standard. Venezuela, Argentina, South Africa, Turkey and Colombia have led the index for several years. And, Venezuela has been the undisputed number one for the past 6 years.

 

 

Bloomberg 2020 Misery Index includes top 5 countries out of 60 economies; Source: Bloomberg< /blockquote>

< blockquote style="text-align: center;">The vertical line represents each 90% devaluation of the currency, which has occurred eight times since 2012; source: Wikipedia

  

Similar to Venezuela, the Argentine peso has lost 90% of its value against the U.S. dollar over the past five years. At the same time, investor confidence in the Turkish lira is also falling as inflation hits 12% in 2020 alone and interest rates on savings accounts have fallen from 8.5% to 8.25%. The COVID-19 pandemic can lead to national lockdowns of economies, travel restrictions, widespread unemployment, lower demand for consumer goods, and reduced business activity. As economic conditions in these countries remain dire and fiat currencies continue to depreciate, citizens need and are turning to other forms of investment and transactions to protect the intrinsic value of their assets.

 

In the past 12 months alone, the Argentine peso's inflation rate has reached more than 20% (data for September 2020), Source: XE.com

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Of course, the G8 countries have not been spared. The U.S. unemployment rate rose 25 places under the Trump administration to 25th globally.

 

The hyperinflationary event of the early 1920s, wheelbarrows replaced wallets

 

Looking for safe haven assets

 

Safe haven assets are defined as "investments that are expected to retain or increase in value during times of market turmoil." Gold has historically been the first thing that comes to mind when a store of value (referred to as a long-term store of wealth) is considered. However, while gold tends to protect against inflation, real investment returns have been modest over the past decade. For example, if you bought gold in 2012, you have to wait until the middle of 2020 to really get a negligible positive return in 8 years. Only when looking at a longer cycle beyond a decade does it become clear that gold has been on an upward trend since the early 1970s.

 

Gold Price Performance 1973-2020, Source: Goldprice.org

2011-2020 Gold price performance during the year, source: Goldprice.org

 

In another asset class, the stock market remains enthusiastic and is in the midst of the longest bull market in history, with consecutive hit a new high. The data showed a strong correlation between stock market gains and the size of the stimulus spending package. The U.S. has injected $6 trillion in stimulus spending in 2020 alone, more than all previous quantitative easing (QE) combined. While such a stimulus package may boost stock prices, the true connection to the underlying economy is becoming increasingly murky. Unemployment is hitting new highs of its own, and the economy is showing signs of slowing and even crippling, especially in the current context of COVID-19.

 

So the risk/reward tradeoff of investing in the stock market right now is, to say the least, questionable.

 

How stock prices rose when the Fed went into quantitative easing (QE) mode, and fell when the program was stopped or reversed (quantitative tapering/QT), Source: Real Investment Advice

Nasdaq 100 since market crash in 2008 The performance since then looks similar to a typical asset bubble, hitting new all-time highs since 2011 (data from QQQETF, which tracks the movement of the Nasdaq 100 index), Source: Tradingview

 

Do cryptocurrencies show potential as a safe haven?

 

Cryptocurrencies appear to be waking up from a long bear market that began in early 2018, with Bitcoin hitting 15 in December 2018 A monthly low of $3,300. It is currently in a bull market, with prices fluctuating around $10,000 in recent weeks, although it is still about 50% below its all-time high of $19,783.06 (December 2017). (Rhythm Note: This article was written at the end of September.)

 

Compared to other asset classes, the cryptocurrency market is relatively large Smaller ($340 billion at the time of writing), which triggers a higher “misery index” in popular ways and the potential safe-haven nature of Bitcoin and other cryptoassets.

 

There are many who claim that Bitcoin is a true store of value, so it deserves special attention. If enough investors believe this, it will push Bitcoin to fulfill its self-fulfilling prophecy. However, the most attractive factor in Bitcoin, especially to those afflicted by high inflation, is its very opposite nature: Bitcoin is effectively a deflationary asset.

 

There are only 21 million Bitcoins, which is in stark contrast to all the central banks that are constantly printing money. There are more than 45 million millionaires worldwide, but less than half of them can own one or more bitcoins. Besides Bitcoin, there are many cryptocurrencies that have similar deflationary properties.

 

Bitcoin is a deflationary asset, the total number of bitcoins issued and projected bitcoin inflation rate; source: GitHub

Because cryptocurrencies are not regulated by a government, a country Cryptocurrencies have also been able to remain stable despite economic problems and instability. The lack of government support used to be one of the reasons not to invest in crypto assets, but now it is one of the reasons why they are becoming more and more popular.

 

Neither governments nor individuals can devalue cryptocurrencies because they cannot create more of them. Also, as more and more people use cryptocurrencies, the value of cryptocurrencies increases and becomes more stable. Domestic or international transactions and transactions are also faster and cheaper using cryptocurrencies than traditional currencies. Make payments to anyone, anywhere in the world, in seconds instead of hours or days, and at a fraction of the cost. Given these and other benefits, investor trust in cryptocurrencies is on the rise, as they help people regain control over their finances, provide a safe environment for assets, and protect people from inflation.

 

People living in countries facing high inflation have an earlier and higher desire to switch to cryptocurrencies, making it As a potential stable asset and store of value. Chainalysis, a blockchain analysis company, pointed out in the study, “Venezuela is a good example of what is driving the adoption of cryptocurrencies in developing countries and how citizens can use it to alleviate economic instability. Data shows that when Venezuela’s national legal When the currency is devalued by inflation, Venezuelans use cryptocurrencies more, suggesting that Venezuelans use cryptocurrencies to avoid possible losses on their savings." It was also seen in other Latin American countries, as well as in Africa, East Asia and elsewhere this pattern. Chainalysis’ 2020 Global Crypto Adoption Index ranks Venezuela, South Africa, and Colombia in the top ten, with Argentina at 28 and Turkey at 29.

 

Stable coins as store of value

 

Stablecoins are defined as "cryptocurrencies that peg their market value to an external reference to provide price stability". Stablecoins are less volatile than Bitcoin and the vast majority of altcoins because their prices are pegged to fiat assets. They offer features such as instant processing, security, and privacy of cryptographic payments, while also offering features similar to purchasing physical underlying assets. This removes the fear and misgivings of value fluctuations for those who are not familiar with the crypto world. VeraOne (ticker symbol VRO) is a pioneer in successfully matching stablecoins with physical gold.

 

VeraOne is an ERC20 token that corresponds to gold stored in a highly secure Three parties conduct regular audits with 100% counterparts. The price of 1 VRO is equal to 1 gram of physical gold (XAUEURG). The actual secure physical storage is implemented by AuCOFFRE.com in France. Private citizens have been able to sell and buy precious metals on the platform since 2009. A tokenized version of gold (in the form of VRO tokens) is a combination of AuCOFFRE.com's decade of market knowledge in the precious metals sector, and a formal agreement with the Gibraltar Ministry of Economic Development to issue an internationally recognized legal tender, and VeraOne, as a subsidiary of the platform, is responsible for the results of the setup of blockchain-related aspects.

 

The main purpose of VeraOne is to provide a stablecoin that people can trust. It provides a robust, reliable alternative to existing options that rely heavily on physical assets or classic currencies such as the U.S. dollar. Existing USD-backed stablecoins can be dangerous because the collateral is not 100% guaranteed.

 

VeraOne has developed an exchange currency that prevents excessive fluctuations in value and can provide ) to anyone providing services. For people in countries experiencing tough economic conditions and hyperinflation, stablecoins like VeraOne are ideal for investment and asset protection. However, it is important to note that while the actual gold is stored in a secure physical vault, the VRO token remains on the blockchain.

 

Central Bank Digital Currency (CBDC)

 

While the interest and adoption of cryptocurrencies at the individual level has increased, government exploration and research into central bank digital currencies (CBDC) has also been escalating. CBDC is a new form of digital currency that replaces monetary cash. CBDC builds on existing private payment providers and similar technology to cryptocurrencies, and has the potential to improve payment efficiency, expand financial inclusion, speed up settlement flows, and reduce end-user costs.

 

CBDC builds on existing private payment providers and cryptocurrency-like technology, potentially improving payment efficiency , Expand financial inclusion, speed up settlement flow, and reduce end-user costs. A CBDC could offer consumers more protection, inclusivity, and security than private payment providers.

 

For a CBDC to be a competent tool, a well-thought-out comprehensive digital infrastructure, effective governance and financial technology knowledge. Decisions on how to design community business centers within the domestic legal framework, and an understanding of potential or associated risks, will still take time to develop and assess. Therefore, CBDC is not an immediate solution for investments seeking asset stability and safety in the current period of economic crisis and hyperinflation.

 

Conclusion

 

Overview of this article Some of the problems faced by countries with high inflation rates and their people, and why they look for stores of value other than the national currency they use for day-to-day transactions.

 

Gold is a potential safe haven due to its anti-inflation properties, but its investment performance over the past decade has been poor generally. Stocks are being buoyed by newer, bigger stimulus spending plans, the latest of which pumped $6 trillion into its economy, more than all previous stimulus packages combined.

 

In other words, this has led some investors to reallocate to gold as a potential safe-haven. But for most people, especially in countries with high inflation, the risk/reward ratio of investing in cryptocurrencies (most of which are still at a 50% discount to their all-time highs) seems like a reasonable reason to buy cryptocurrencies.

 

The article further investigates the hypothesis of cryptocurrencies as candidates for wealth preservation and compares different categories, including Bitcoin , stablecoins and CBDC.

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