Crypto Inflation: The Invisible Enemy of Your Investments
Inflation is a word familiar to everyone. We usually hear it in the context of the traditional economy, where the prices of goods and services rise and the purchasing power of money decreases. But what about the crypto market? Yes, this too has its own specific form of inflation, and understanding its mechanisms can become your superpower in the struggle to preserve and increase capital.
Impact of Inflation on Cryptocurrencies
The impact of inflation on cryptocurrencies is a complex and multifaceted process that is fundamentally different from inflationary processes in the traditional economy. Let's take a closer look at two key aspects: predetermined supply increases and staking interest, and how they affect the crypto market.
Predetermined Increase in Supply
In the world of cryptocurrencies, inflation is often inherent in the cryptocurrency algorithm itself. This means that the rate at which new coins are put into circulation is initially determined and known to all market participants.
Bitcoin example: Bitcoin is designed so that the total number of coins that will ever be created is strictly limited to 21 million. This creates a shortage that should theoretically support the price of Bitcoin in the long run. However, every 4 years there is an event known as "halving", where the reward for mining a block is halved. This gradually reduces the rate at which new Bitcoins are put into circulation, creating some inflationary pressure in the short term until the total supply approaches its limit.
Steakin' Percentages
Staking is a process where cryptocurrency holders can "freeze" a portion of their coins as a stake in the blockchain to support network operations through a process known as Proof of Stake. In return, they receive rewards in the form of new coins. This creates an additional way to increase the supply of coins in circulation.
Impact on Inflation: While staking rewards incentivise blockchain participants to keep the network secure and active, they also increase the total number of coins in circulation, which can contribute to inflationary trends. This is particularly noticeable in cryptocurrencies with high staking fees, where new coins are created and distributed to participants regularly and in large volumes.
How to Protect Against Cryptocurrency Inflation
Protecting against inflation in the world of cryptocurrencies requires strategic and considered decisions. Let's take a closer look at the suggested methods: portfolio diversification, investing in deflationary assets, as well as staking and pharming.
Portfolio diversification
Portfolio diversification is a key investing principle of spreading investments across different types of assets to reduce the risk of loss in a portfolio. This is especially important in the world of cryptocurrencies, where volatility can be extremely high.
Inclusion of different assets: Including stocks, bonds, real estate and other traditional assets can help reduce overall portfolio risk, as these assets often have other risks and returns not directly related to the crypto market.
Diversity in cryptocurrencies: Even within a crypto portfolio, it's important to have diversity - invest not just in Bitcoin and Ethereum, but in other altcoins as well as stablecoins that can offer resilience in more volatile times.
Investments in Deflationary Assets
Deflationary cryptocurrencies are those that have mechanisms in place to help reduce the overall supply of coins over time, which can help increase their value.
Limited supply: Cryptocurrencies with a fixed maximum supply, such as Bitcoin, can be considered more inflation-proof because their total supply is limited.
Coin Burning Mechanisms: Some projects regularly "burn" some coins (i.e. destroy them) to reduce the overall supply and potentially increase the value of the remaining coins.
Steakin' and Farmin'
Staking and farming are methods of making money from cryptocurrency that can help investors generate returns that potentially exceed inflationary losses.
Staking: Allows coin holders to earn rewards for participating in supporting the operation of a blockchain network. Choosing cryptocurrencies with high interest rates for steaking can provide income that helps offset the effects of inflation.
Yield Farming: This is a complex process in which users earn rewards for providing their assets as liquidity on decentralised financial platforms (DeFi). Yield farming can offer even higher percentages of returns, although it comes with greater risks.
Conclusion
Protecting against inflation in the crypto market requires proper planning and a strategic approach. Diversifying your portfolio, investing in deflationary assets, and engaging in staking and pharming can help not only protect your investments from inflationary pressures, but also ensure their growth over the long term. It is important to analyse carefully and consider different strategies based on your investment profile, risk appetite and financial goals.
