I came across a recent article on CNBC that had some Warren Buffett quotes on how to protect yourself against inflation. I always like to take financial advice from people who truly walk the walk (Buffett is worth over $100 billion), and not armchair experts on Reddit who are broke. Inflation in the US in June 2021 was north of 5% annualized, a HUGE figure, and the US Federal Reserve has recently predicted that we will see a good amount of inflation to come. For comparison, a nominal figure for inflation that countries strive for is 2%, which is essentially a number a New Zealand economist pulled out of his rear end and everyone now takes it as gospel. At 5% inflation, you’ll need to be getting at least a 5% raise at your job or 5% increase on your investments to maintain the same amount of power to buy things that you have currently. In the words of Buffett- “inflation is the tax that truly hurts everyone.” No one is exempt. After seeing this article I wanted to mention how cryptocurrency is and will be an excellent hedge against inflation.
No need to read the article (which is clickbait), I’ll just tell you what Buffet said:
· Invest in yourself, it always pays off
· Invest in a company that you like and everyone loves, it will stand the test of time
I’d like to add a third item to that list:
· Invest in crypto assets that are deflationary or have highly controlled inflation (most of them do)
This is a blog about crypto, so I’m going to dive deep into why I think crypto is an excellent inflationary hedge, but I do want to say a few words about Buffet’s two ideas. If you’re the best at what you do- whether it’s fixing cars or fixing spreadsheets, there will always be high demand for your services, and you won’t need to worry about inflation. I’m a huge believer in the growth mindset and believe you can better yourself with focus and it will likely pay off several times over. I spent many nights and weekends working on my aerospace engineering master’s degree while holding down a full time job- when it was done, I got a 21% raise and it only took a few years for the degree to pay for itself. Then I went and spent $150k+ on an MBA from Dartmouth, and since I only graduated last year, that degree has not yet paid for itself- but I did receive a 71% pay bump from the salary I was earning after my first master’s! It’s only a matter of time. Not only will I financially be better, but I feel much more skilled in my job and confident. So I agree with Buffett’s advice to invest in yourself. His other advice- investing in a company that you love and everyone loves like Coca Cola because there will always be demand for that product- well, I believe that too. On a similar note Buffett once said that he’s willing to invest in any company whose logo people are willing to get tattooed on their bodies- like Harley-Davidson Motorcycles or Nike or Ferrari. Good products and technologies stand the test of time.
Which brings us to crypto. Decentralized finance, a big part of crypto networks, will thrive where there are institutional voids and government instability. Human history has shown us that periods of government stability are the exception rather than the rule. As I have pointed out, roughly 5 billion people on the planet right now do not have access to proper financial services. It’s going to take a long time to bring them that access- but it will be crypto who gets them that access first. Even for those who do have access to financial services, like a Philippine immigrant in the US who sends money back to their family and pays a 30% fee to Western Union- would love a financial product or service that doesn’t charge them so much just to send money from A to B. Finance isn’t going anywhere anytime soon- but it will change and become more decentralized.
Bitcoin as a Hedge Against Inflation
The median government debt for an OECD (developed) country is 110% of its GDP, compared to roughly half that figure 20 years ago, and it has only been increasing. Debt: The First 5000 Years is an excellent book that argues that any government entity that has carried debt greater than 60% of its annual output (GDP) has eventually capitulated. While the 21st century global economy is far different from examples used in the book like the Mongol empire, the book illustrates a good point. Governments are printing money like mad. On the other hand, the number of Bitcoin added after the most recent halving in 2020 stands at 1.82% of the total supply per year, and the number added will likely decrease less than half of that figure after the 2024 halving event and even lower after the 2028 halving event. Then the new coins added will be zero- which means if demand continues to rise as the technology catches on, the price will rise. When crypto YouTubers are doing technical analysis and talking about the “bull market cycle” they’re referring to the 18 months following these halving events. This controlled inflation of Bitcoin stands counter to what governments across the world do every single time a recession or crisis comes- they print money, inflation happens, and prices increase. Of the major global powers, the United States is perhaps the worst offender here.
That’s the story with Bitcoin, which all other cryptos tend to follow when it comes to price movements. What about ETH? Ethereum, the second largest crypto by market cap, will become a deflationary asset with Ethereum 2.0. In Ethereum’s newest release, ETH will be burned off in each transaction that occurs- so the more activity that happens on the network, the more the supply of ETH is decreased. Demand doesn’t even need to go up for the price of ETH to increase- it could merely just stay the same as long as the amount bought or burned equals the annual new supply issued- this is highly likely to happen.
Obviously, there are many other coins. One thing to check before you invest in a coin (among many things you should be checking) is how the supply of that coin is managed. If the makers of the crypto are continuing to mint a lot more new tokens or coins, this will create headwinds for the price of the coin. For reference, here are some of the supply outlines for the top cryptos:
· Bitcoin: 21 million coins maximum supply, with 19 billion currently in circulation (91%)
· Ethereum: maximum annual supply of 18 million ETH, with 117 million currently in circulation (currently 16% inflation)
· Binance Coin: 170 million maximum supply, with 153 million currently in circulation (90%)
· Cardano: maximum supply of 45 billion, with 32 billion currently in circulation (71%)
· XRP: maximum supply of 100 billion, with 46 billion currently in circulation (46%)
· Dogecoin: unknown maximum supply, with 131 billion currently in circulation
· Polkadot: 1.09 billion maximum supply, with 1.01 billion currently in circulation (93%)
· Uniswap: 1 billion maximum supply, with 519 million currently in circulation (52%)
· Litecoin: 84 billion maximum supply, with 57 billion currently in circulation (68%)
· Solana: 489 million maximum supply, with 273 million currently in circulation (56%)
· Chainlink: 1 billion maximum supply, with 440 million currently in circulation (44%)
You can see most of these cryptocurrencies have caps, and the more adoption we see in any of these coins, we will see the price go up as time moves to the right. Keep in mind the top cryptos in ten years won’t be the same as the top cryptos now, and some of these projects might even fail. The crypto with the most maturity here is obviously Bitcoin with 91% of coins already issued and the largest number of holders. For comparison, the theoretical supply of any fiat currency is unlimited and can and will change with who controls the government. We have yet to see a crypto equivalent of the hyperinflation the world has witnessed in Weimar Republic Germany or 20th century Argentina or Venezuela in the 2000s and 2010s. Still, many of the networks are open protocols, meaning the key decision-makers will have the ability to run up the supply of coins should they decide. If any of these stakeholders have large amounts stored in the cryptocurrency, it would be against their own interests to do so. Most creators of cryptocurrencies are still in the game today given how young the technology is, but we can see conflicts of interest where creators are becoming rich through the adoption of their own currencies. Good projects generally protect against this by being created in a certain way which I’ll explain in another post. As crypto investors we should always be aware that there are many, many shitcoins that exist for no other purpose than to make their creators rich and have no intrinsic value and are usually a carbon copy of another crypto. I liken these to the hundreds of Dotcom companies that were overvalued prior to the 2000-2001 crash. People just heard “internet company” and threw money in without any thought at all to the company’s fundamentals or financials. Stay away from these shitcoins (i.e. Shiba Inu, Cum Rocket) like the plague. Even if they do move toward the sky, typically less than 1% of all holders of the crypto turn a profit. History has shown that those who balance their portfolio with a good share of each of the very top cryptos do very well- the further down the list of top cryptos by market cap you go, the tougher it’s going to be to find that magic bullet that’s going to 10, 100, or 1000x in a short time period. For me, I thought for sure it was going to be Theta Network, which has seen a 60% decline since I initially bought in a few months back. The future still waits, though. When you’re able to find an investment that has returned several times what you originally invested, it’s best to blame dumb luck rather than your skill as an investor.