In one of my last articles, I made some observations on why people think cryptocurrencies are a hedge against inflation. But what I didn’t say is what I personally thought about cryptocurrency as a hedge against inflation.
Right now, inflation is approaching seven percent in the United States, and you can really feel it in some places. In San Francisco, after you wipe the human feces from your shoe and fill up your car, you find that you’ve paid $4.83 per gallon.
Why Crypto Is Still a High Risk Investment That Is Greatly Overvalued
I won’t say whether it is a good or bad store of value, but I will say it is a risky investment for several reasons. Before getting into this game, you need to understand that cryptocurrencies are highly speculative. So, if you put your life savings into Bitcoin, currently valued at around $50,000, and then it crashes to $25,000, half the value of your savings is gone. Investments like that are not good long-term solutions for hedging against inflation.
Another factor that makes cryptocurrencies risky is that some governments have banned them. Suppose you live in a country where the authorities zealously enforce the ban, like China. In that case, your cryptocurrency will have become absolutely worthless unless you decide to move to a country where they are legal.
Are Cryptos Overvalued?
If you want to keep your wealth in a safe store of value, an overvalued asset is a dangerous way to do that.
There are signs that we are at the end of the Covid panic: the Conservatives have just lost North Shropshire to the Liberal Democrats, which is a seat that has been controlled either by the Conservatives or Tories since around the time Lord Wellington was prime minister.
One of the reasons why the Conservatives were routed by the Lib Dems in North Shropshire is that their voters were largely dissatisfied with the performance of Prime Minister Boris Johnson, who has basically let the NHS run the country since Covid began, resulting in endless lockdowns, and people are tired of it. A similar result may hit the Democrats in America in the upcoming midterms, as a large cohort of Americans are just as equally as frustrated over vaccine mandates and lockdowns as Britons.
One of the main reasons cryptocurrencies went up in value is that people were frightened that pandemic related stimulus would destroy their national currencies, so they started putting their money in crypto to protect themselves against potential hyperinflation. If popular resentment over Covid restrictions pushes new political majorities to end lockdowns for good, there would be a subsequent massive uptick in economic activity and people would be more likely to use dollars, pounds, and etcetera to go on a spending spree instead of cryptocurrencies.
The result would be a significant decline in the prices of cryptocurrencies all across the board as confidence returns to the market and strengthens the dollar and other reserve currencies like the pound sterling and euro.
Don’t Put Your Eggs in One Basket
It suffices to say that cryptocurrency is a short-term investment rather than a long-term one, and quite a risky and overvalued one at that. The price could drop rapidly at any moment due to random sell offs, your government could ban it at any moment if your central bank sees it as a threat to the national currency, or an end to permanent lockdowns by fearful politicians afraid of losing their seats in legislatures.
I am not saying that you should not buy cryptocurrency. Go ahead and buy some, but do not spend more than you can afford to lose. Another thing you can do is also buy gold and silver, which are considerably less risky than cryptocurrency. That way, you will have a diversified portfolio with multiple means to protect your savings from inflation.