3 tips on investing in crypto during inflation

The term “inflation” comes from the Latin word infla-tIo, which means “blow”. It refers to the overall rise in prices for goods and services. This happens when there’s too much money circulating, causing its value to drop, and prices to rise.

Simply put, you buy a pair of cool pants for $20, and after a year, six months, or even a month, their price rises to $35. The product remains the same, so does the quantity, but there is more cash in the market.

Currently, traditional currencies experience relatively high inflation. You can see this on the map created using data from the International Monetary Fund.

The inflation rate of fiat currencies in different countries. Source: imf.org

In some countries, it reaches two-digit and even three-digit numbers! For example, in Argentina, the inflation rate is 138.3%, and in Venezuela – 318%!

In comparison, the inflation rates of leading cryptos like bitcoin and ethereum is relatively low. According to Glassnode analysts, the monthly inflation rate for bitcoin is 1.736%, and for ethereum, it’s 0.18% according to Ultra Sound Money.

Why do cryptocurrencies have such low inflation rates, and what makes them a great investment choice? Let’s break it down!

Limited supply of cryptocurrencies

Many cryptocurrencies have a limited supply. Unlike fiat money which can be printed endlessly. Take bitcoin, for instance, with a fixed cap of 21 million coins. This restriction puts a ceiling on inflation.

Moreover, bitcoin experiences a halving event every four years, automatically reducing the mining reward, slowing down the rate at which new bitcoins enter circulation.

In the case of other cryptocurrencies like ethereum, they use a method called burning to prevent inflation. This involves destroying a portion of coins at scheduled intervals.

Decentralisation of crypto

Cryptocurrencies operate without control from central banks or governments, making them decentralised.

Yet, this lack of oversight comes with its own set of risks. So, it’s crucial to thoroughly research and analyse information when deciding which project to invest in.

Crypto as an alternative to national currencies

In countries with unstable monetary policies, crypto steps in as an alternative to local currencies. People in these regions use it for both saving money and making transactions.

Take Ukraine, Turkey, Argentina, Thailand, and various African nations as examples. That’s why these regions often score high in crypto adoption rankings.

Invest for the long term

Cryptocurrency also has the benefit of performing well over the long term. While the values of assets can fluctuate due to changes in prices, the return on investment in digital currency might increase significantly in the next five years and beyond, potentially counteracting global inflation.

By the way, analysts from the Bitcoin Strategy Platform reveal that 76% of all currently available bitcoins are held by long-term investors.

Long-term investors hold 76% of all currently available bitcoins. Source: bitcoinstrategyplatform.com

Moreover, cryptocurrency is still in the early stage of development. Although the market capitalisation already exceeds $1,33 trillion as of 8th November 2023, there is still enormous growth potential.

Transparency and immutability of crypto

And finally, what makes crypto different is transparency and unchangeable rules. Although there are occasional alterations to the codes of blockchain project protocols. But they usually happen with the community’s agreement and follow existing rules.

For instance, after the update, the amount of available ether in the market began to decrease. Imagine what might have occurred if this update hadn’t been implemented.

ETH supply: without update (white line) and with update (blue line). Source: ultrasound.money

3 tips on how to invest in crypto with minimal risks

To get the maximum benefit from crypto during inflation, use a few simple life hacks.

1. Consider the investment period. To guard against inflation, it’s best to hold crypto for the long term. In the short term, the value of digital currencies often fluctuates which can lead to potential losses.

We also suggest following the Dollar-cost averaging strategy. This means making small, regular purchases of crypto assets instead of large and impulsive ones.

For instance, if a coin costs $10, investing $500 buys you 50 coins at once. However, if the coin’s price drops to $8 tomorrow and rises to $11 the day after, you’ll experience both losses and gains.

By using the Dollar-cost averaging strategy, you buy coins regularly (for example, every month) and in small defined amounts (for instance, $100). This way, the average price of one coin with regular small purchases will be lower, ensuring a conservative approach is followed.

For those with trading experience, a more aggressive version involves adjusting the investment amount based on market cycles. During a bearish market, invest more with each price drop, and during a bullish market, wait for pullbacks and avoid buying at highs.

DCA for BTC, Gold and S&P 500. 1 – Total value in USD; 2 – Rate of return; 3 – Rate of drawdown (Gold – orange, bitcoin – blue, S&P 500 – green). Source: twitter.com/DylanLeClair_

2. Don’t put all your eggs in one basket. The head of the analytical department at AMarkets recommends investing only 10% of your funds in crypto to minimise losses from price drops and survive market recoveries.

3. To reduce risks, consider investing in stablecoins pegged to strong currencies, like the US dollar. On EXMO.com, there are three such cryptocurrencies: USDT, USDC, and DAI. And with our Earn program, you can earn up to 65% annual interest for the first month when you hold them.

You can also invest savings in XAUT – a digital asset backed by real gold. Gold is a reliable asset for protecting your investments against inflation, so this is a balanced decision. By the way, on EXMO.com, you can trade XAUT with USDT.