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Inflation: Are Crypto-Currencies the Answer?

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Inflation is a word that seemed to dominate the news in 2021. Most of us understand that inflation is when the cost of buying items and services is higher than it was for same items or services last year—or last month. Example: Previously you could purchase all your weekly groceries for $120, but now it cost $150 for the same items; that’s inflation. While not everyone agrees as to why we have inflation, nearly everyone agrees that inflation is happening. 

What can you do to protect your investments against inflation?

Historically, stocks have risen with inflation; the key is to have diversity. When you own many companies and sectors you are less dependent on any one of them. ETFs can provide that diversity. During times of inflation, gold can act as a ballast. Throughout history, it has been able to maintain purchasing power as prices rise. Real Estate is also considered a good hedge against inflation. Rents and property values tend to rise during inflationary periods

What about crypto-currencies: can they protect against inflation?

Possibly, but we see them as being part of an inflation hedging strategy and not a sole solution in themselves. Crypto-currencies in general are based upon speculation. They are not companies that produces goods or services. Arguably the most popular crypto-currency is Bitcoin, which has been wildly unstable in the past four years. Worth $20,000 in 2017, one Bitcoin declined to $3,000 in 2018. Values were back to $20,000 at the end of 2020. This year, Bitcoin climbed to above $60,000, then fell to around $30,000, then back up to over $60,000. It is currently hovering around $46,000. 

The other problem with crypto-currencies is how to hold or trade them. You cannot buy them directly on the New York Stock Exchange or the Nasdaq. You can now get exposure via an ETF that is based on Bitcoin futures, or in a trust that owns some underlying crypto-currency. You can also buy crypto on various exchanges. None of these are perfect solutions. The problem with futures is that they are not efficient during rising prices when you have to pay more to keep them. The fancy investment word for this is “contango”. A difficulty with trusts based on underlying crypto holdings is that they do not always track the value of the crypto-currency closely. Thus, when prices rise you may not be able to immediately sell your trust shares for a profit. The lag time could be months.

There are various crypto-currency exchanges, but they all have different rules and levels of legitimacy. Some of these exchanges are potentially dangerous and could be associated with scams.

What does Sommers Financial Management suggest to protect against inflation?

While we do not know the future and have no ability to predict investment prices, we see that historically investing long-term with diversity has been a proven strategy to protect and increase wealth. We use bonds, stocks,  gold, real estate, commodities and crypto-currencies in many of our portfolios to provide diversity in the face of ever-changing economic climates.