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How does inflation decrease the value of your money over time and how do we hedge against it?

Inflation is a rate at which the prices for goods and services are rising in a currency, the value of which falls over time. The inflation rate is both controlled and influenced by the central banks since the government controls the supply by printing more money. As a result, people’s purchasing power is being eroded leaving behind social instability and individual concerns over financial safety.

  • Inflation facts:
    7% — global inflation rate in 2023. 3% — G7 countries’ average rate.
    7 countries have an inflation rate of over 50%: Venezuela, Argentina, Turkey, Lebanon, Syria, Sudan, Sierra Leone.
    7 countries have deflated: Afghanistan, Seychelles, Costa Rica, Thailand, China, Bahrein, and Benin.

Here are 3 main ways to hedge against inflation and keep what you have earned:

  • Hamster Wheel: keep up by earning more and more

    In a traditional system, to hedge against inflation, one has to invest with a return on investment (ROI) that outperforms the inflation rate. But there are two major downfalls:

    The risk is still there: the higher the ROI, the bigger the risks.
    Keeping a truly diversified (=less risky) investment portfolio might take not only considerable time but also special knowledge and sometimes certification, thus the need for a third party, additional fees, and risks.

    The average S&P return is 10.5% over the last 100 years.

  • Real Asset Wheel: Hedge with real assets or businesses

    Investing in real assets might require maintenance, time, and additional investments. There might also be asset-specific risks: for example, real estate crises are in direct correlation with financial crises. The most popular assets include:

    1. Real estate and land
    2. Precious metals like gold
    3. Collectables like art pieces
    4. Natural resources, equipment etc.

    In 2023, gold outperformed S&P.

  • Decentralized Wheel: use alternative solutions governed by people

    Inflation is often presented by economists as a natural phenomenon but is a direct result of the current monetary system. Cryptocurrencies were designed to battle this system by taking the power from central banks, giving it to people, and inventing such instruments as limited supply. For example, no more bitcoins can be technically created when 21 million will be mined. Of course, not all cryptocurrencies were invented equally. But there are 3 general ways to be involved in the sector:

    1. Hold crypto to wait for a currency with limited supply to deflate
    2. Stake cryptocurrencies
    3. Invest in cryptocurrency projects

    In 2023, Bitcoin outperformed both gold and S&P.

    Stay tuned to learn more about alternative ways to keep the value of money earned!


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