Since reunification, prices in Germany have not risen as rapidly as they have over the past twelve months. But inflation doesn’t just make goods more expensive, it also devalues our currency, the euro. Savers in particular notice this. Of the 100 euros you had in your account a year ago, you can now buy significantly fewer goods and services in real terms. With an inflation of 7.3%, 100 euros only have the purchasing power of 93.20 euros after one year. This way, your savings no longer grow over time, but become less and less valuable.
There are different ways to counter this. One is investments that promise returns higher than the rate of inflation. Equities have been a good example of this in recent years. The Dax has been increasing by an average of 11% per year for more than 30 years. Even with 7.3% inflation, the net result is still an increase in the value of your investments.
Real assets as inflation protection
Real estate has also shone with high returns in recent years. But they still offer a different kind of protection. Even if their value should increase less than inflation, you at least have something tangible to live on – or earn money by renting.
There are also tangible assets that theoretically work counter-cyclically. Gold, for example, has been considered a safe haven for decades. What is meant by this is that the value of gold increases when currencies – and therefore also investments based on them, such as stocks and bonds – fall and vice versa. In fact, this theory still has many supporters. For example, the physical gold sales figures in Germany increased significantly during the Corona crisis. More and more people around the world are now buying certificates that reflect the price of gold. As a result, the price of gold has risen 20% over the past twelve months – far more than the rate of inflation.
A long-term study over the past 50 years shows that gold has actually appreciated more in value on average than inflation-devalued currencies. In the long term, the precious metal is therefore a good protection against inflation. This is because the amount of gold on Earth is finite. Unlike currencies, no central bank can arbitrarily increase the quantity of gold and therefore not control the price of gold.
How Bitcoin Works as an Inflation Hedge
The younger generation has rediscovered this principle over the past decade. Cryptocurrencies like Bitcoin work on the same principle. Although the amount of mined bitcoins is constantly increasing, it is only slowly growing. It’s also limited: once 21 million digital pieces have been produced, it’s over. Inflation due to an increase in supply cannot occur here either.
In theory, this gives cryptocurrencies a position similar to that of gold. They too are immune to the inflation of conventional currencies. Therefore, they should also be suitable as inflation-proof investments. In the long run, it definitely is. Over the past six years, Bitcoin has gained over 9,000% against the US dollar. Inflation has not increased so fast.
But: Investments in cryptocurrencies are associated with high risk. Bitcoin and other digital coins can sometimes fluctuate dramatically in value. The problem with this: unlike stocks, commodities and bonds, this is difficult to predict even for professionals. There are no physical assets behind cryptocurrencies. With a bitcoin, you are not buying a piece of coal, a stake in a company, or lending money to a country. Additionally, since no central bank controls the Bitcoin rate – which is an advantage of cryptocurrency in many ways – prices often swing up and down.
Anyone buying bitcoins as inflation protection should therefore consider two things: First, you should only invest a portion of your assets in cryptocurrencies. For example, more traditional investments such as equities, which are more sensitive to inflation, can be protected. In theory, bitcoins should go up in value when stocks go down and vice versa. Second, cryptocurrencies are a long-term investment. While prices can fluctuate wildly in the short term, they have always risen in the long term. You may not see a 9,000% growth rate in six years, but it’s good enough if the return is higher than the rate of inflation.
- For more information on how to protect your money against inflation and the role Bitcoin can play in it, watch a free webinar with money and crypto expert Jörg Hermsdorf on April 27. Secure your ticket here!
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