As if the bout of inflation over the last few years wasn’t painful enough for everyday investors, there are, unfortunately, plenty of good reasons to believe that the U.S. dollar is going to get significantly weaker and weaker from here on out.
One data point is that the Congressional Budget Office (CBO) projects large federal government deficits to persist for decades, pushing the national debt toward roughly 150% of gross domestic product (GDP). Paying off the interest on that debt is almost certainly going to require printing more money.
If you are uneasy about that backdrop, as I am, it’s rational to seek protection for your portfolio. Even though crypto is volatile and unproven as an inflation hedge, there are still a trio of candidates that are likely to be good investments for these upcoming inflationary conditions, so let’s take a look at each.
1. Bitcoin
Bitcoin (BTC 3.01%) is an asset that provides pure exposure to the concept of scarcity. There can only ever be 21 million Bitcoins, more than 93% of which have already been mined, and only around 1.3 million remain to be created, as issuance falls sharply every 4 years via halvings. This coin is not a fiat currency, and so it cannot be printed such that its value is diluted.
Thus, in a world where debt obligations will expand quickly, holding an asset with programmed scarcity is a decent hedge, as its price doesn’t require ever-increasing demand to continue rising thanks to its perpetually shrinking supply.
Just be aware that Bitcoin can drop 70% or more when liquidity conditions are poor.
2. Zcash
Zcash (ZEC 9.03%) explicitly mimics Bitcoin’s supply design, as it has proof-of-work (PoW) mining, a fixed 21 million token cap on its supply, and a halving schedule that slashes supply growth on a regular basis. Its main differentiator from Bitcoin is its optional privacy feature, which uses advanced cryptography called zk-SNARKs to let users hide the sender, receiver, and amount being transferred from public view.
But that privacy is also precisely why regulators worry that Zcash can enable illicit finance. That could make liquidity patchy, and so it makes Zcash into a higher-risk option to hold at the edge of a portfolio.
3. Ethereum
Ethereum (ETH 4.87%) is the crypto sector’s principal smart contract platform, where people deploy decentralized applications (dApps) and where most decentralized finance (DeFi) is done in practice. That means it has utility, but it also has features that enable it to behave as a store of value.
As a portion of every gas fee is burned, thereby permanently removing tokens from circulation to offset the new issuance provided as a reward for staking, its scarcity is dynamic rather than fixed. Frequently enough, there’s sufficient burning to actually reduce the coin’s outstanding supply, so holders won’t necessarily get their value diluted over time. Furthermore, holders can also stake Ethereum themselves and earn around 3% to 4% annually for helping secure the network, which neither of the other coins above can do natively.
Therefore, in a dollar-weakening scenario, Ethereum could behave like yield-bearing collateral, maintaining its purchasing power with ease through multiple interlocking mechanisms. And that’s before even getting into the growth potential that it has as a result of its DeFi ecosystem, which is likely to deliver real growth for holders over the long run.
