Hedging Against Deflation and Inflation
Deflation and Inflation are economic factors that investors must take into consideration when planning and managing their investments.
Deflation is the term used to describe a general decline in prices of goods and services.
Inflation is defined as the rate at which prices for goods and services is rising.
Inflation and deflation are opposite sides of the same coin. When one trend is clearly in motion, the steps investors can take to protect their portfolios are clear.
When inflation and deflation are both threatening at the same time, the proper steps to take are a bit more difficult to discern.
How to Plan for Both Deflation and Inflation Pressures
Sometimes it’s hard to tell whether inflation or deflation is the bigger threat. When you can’t tell what to do, plan for both. A diversified portfolio that includes allocation to investments that fare well during inflationary periods and investments that fare well during deflationary periods can provide a measure of protection regardless of what happens in the economy.
Beat Deflation
When deflation is a threat, investors go defensive by favouring bonds. High-quality bonds tend to fare better than stocks during periods of deflation, which bodes well for the popularity of government-issued bonds.
On the stock side, companies that produce consumer goods that people must buy no matter what (think toilet paper, food, healthcare) tend to hold up better than other companies — these are referred to as defensive stocks.
Dividend-paying stocks are another consideration in the equity space.
Cash also becomes a more popular holding.
Beat Inflation
If you are young and still in the workforce, your best defense is your talent. Wages tend to keep up with inflation, at least over long periods.
If you are retired, you’ve got only your retired savings/retirement fund to lean on.
Inflation is, deservedly, retirees’ second biggest source of anxiety (after health). They are old enough to remember the 1970s, when the prices of everything went through the roof. Everything except bonds, that is. Bond portfolios were massacred.
Owning REIT shares may be a solution to mitigate rising prices of goods and services.
Owning Gold To Beat Inflation & Preserve Wealth
For many years throughout human history, the role of gold has been to preserve wealth. When there is significant uncertainty in markets, including times of heightened inflation, people flock to gold to be able to store their wealth than let it erode via fiat money (paper money).
Gold is a safeguard for crisis, as it stands for trust – at least when bought in physical form and not in the form of derivatives or some kind of futures.
Are there, other things that tend to keep their value during inflation if that’s what most people want.
In the next section, we will discuss about a new digital asset that have many qualities of gold that intrigued many early adopters. Let’s jump in!
Digital Asset_Cryptocurrency
A cryptocurrency is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography.
In 2017, people started to have a growing interest in cryptocurrency, as a currency and a investment asset class (like Gold).
Since Aeons ago, people are trading goods and services among one another, first through bartering, then exchanging them through using alternative securities (such as commodity like gold, cash money, cheque, credit card, etc) as payments.
A simple example of a barter arrangement would be when a carpenter builds a fence for a farmer. Instead of the farmer paying the builder $1,000 in cash for labor and materials, the farmer could give him $1,000 worth of crops or foodstuffs.
Although virtually any item or service can be bartered if the parties involved agree to the terms of the trade. It is impractical because it takes a lot of time and work. Consider what life would be like in a barter economy. You were a skilled artisan who made tables, then you’d barter tables for the things you need, like food. You need to search for someone who is both in need of a table and has food you want. It takes a lot of time and hardwork, and you’re hungry now.
Another problem barterers run into is deciding on an equal trade. You’ve probably heard the expression, “It’s like comparing apples to oranges.”
When a society agrees on an acceptable form of currency, however, these problems either disappear or severely diminish. You no longer have to find people who have what you want and are willing to barter their stuff for what you’re offering.
Like the saying goes, money isn’t everything. Inflation can cause a unit of currency to lose value — meaning that, while 50 cents could buy a bushel of apples last year, it may only buy a single apple this year. These fluctuations can hurt a society, causing stress, uncertainty and disaster to its economy. If things get bad enough, bartering, with all its disadvantages, can become an attractive alternative. This is why people resort to bartering in situations of great poverty or disaster.
The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929. Since then, the ‘trust’ element of our existing financial instruments is lacking in the minds of most people. People started to lose confidence in governments’ and financial institutions’ abilities to manage currencies using existing laws and regulations. This gave rise to the impetus of developing alternative ‘trusted’ security from Fiat currency (such US Dollars, Euro, etc).
Notes: Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver cash (bond). Fiat money is a currency that a government has declared to be legal tender, but is not backed by a physical commodity.
In 2009, a person or group of people known by the pseudonym Satoshi Nakomoto invented and released the blockchain technology as a way to digitally and anonymously send payments between two parties without needing a third party to verify the transaction. It was initially designed to facilitate, authorize, and log the transfer of bitcoins and other cryptocurrencies.
As an #Bitcoin investor/speculator, you want to know the answer to the question, “Is the long stretch of new highs and recent lows (of Bitcoin) sustainable in the long run?” with confidence before you put in your hard earned money into the investment.
Once upon a time, a bitcoin was trading at USD $0.10
Then without interruptions, it has been breaking new highs with each passing year.
Feb. 2011 at USD 1…
Aug. 2013 at USD 108…
Feb. 2017 at USD 1,017…
In 2017, more people take notice of the above fact.
Fast forward to Today, 05 December 2018,
Bitcoin was at USD 3,905.10 (price at coinmarketcap.com).
BTC Dominance: 54% Total Market USD 125,972,536,342
Let dive deeper into possible reasons for the new highs of Bitcoin with each passing year except the whole of this year 2018.
- By “Satoshi Nakamoto” design, the number of Bitcoin that can be produced is fixed at 21 millions. Latest figure indicated that there are about 17.4 million in circulation right now. Through the years, coins that could be created are becoming lesser due to more complexity and difficulty in mining. The limited supply creates a high demand for it and a higher Bitcoin price.
- Bitcoin is always compared with Gold, as a safe haven asset.
Gold vs Bitcoin (Digital Gold 2.0)
Let look into some of the characteristics, the pros and cons of Bitcoin.
a) Durability – There is a vulnerability of Bitcoin being stolen due to someone hacking onto its online wallets, users’ computers or smartphones. In comparison, there is a degree of higher difficulty of unsecured gold being stolen due to its size and weight.
Conclusion: Bitcoin is slightly losed out with Gold in term of durability.
b) Intrinsic Value – Both Gold and Bitcoin are limited in supply. Although forking will create other coins, it will not create two identical Bitcoin (e.g Bitcoin Cash is not Bitcoin. It is an Altcoin.)
Conclusion: Both are equal on this count.
c) Portability – Transferring bullion can be very expensive given, its weight and need for more high level of security in transportation, higher import taxes like India. It is much faster and cheaper to move Bitcoin around.
Conclusion: Bitcoin beats Gold hands down for portability.
d) Unit of Account – Bitcoin has better purchasing holding power than maturing gold from 2010 to 2016 years of comparison.
Gold – 2010 (+27.74%); 2013 (-27.74%); 2016 (9.12%)
Bitcoin – 2010 (9,900%); 2013 (5,587%); 2016 (128%)
In term of today’s market cap., Gold has about USD 6.8 trillion vs about Bitcoin of USD 68 Billion (about 1 is to 100 times).
Assuming 1/10 (10%) of Gold cap. goes to Bitcoin_Gold 2.0 market, that is about 680 Billion.
One Bitcoin is then worth about USD 32,380 (680 Billion divides by 21 million)
At 1/20 (5% of Gold cap.), it is worth USD 16,190.
At 1/40 (2.5% of Gold cap.) it is worth USD 8,095.
Conclusion: We are only talking about one entity’s comparison only. The potential of Bitcoin price per se is huge and very huge indeed!
Overall Conclusion: One could say that if the dust is settled as highlighted above, the potential of Bitcoin rise to USD 8,000 or more is likely and not impossible as one seems to think so initially.
Billionaire Mark Cuban told Vanity Fair in 2017, it’s OK to invest up to 10 percent of your savings in high risk investments, including bitcoin and ethereum. You’ve just “got to pretend you’ve already lost your money,” he said, adding that it’s like throwing “the Hail Mary.”
Tony Robbins has his own analogy for investing in bitcoin: It’s “like going to Vegas,” he told CNBC’s “Fast Money.”
Cuban and Robbins advise only betting on what you can afford to lose. If you win, great; if you don’t, at least you only lost discretionary funds.
If you are considering investing in bitcoin or other cryptocurrencies, it may be best to treat your “investment” in the same way you would treat any other highly speculative venture.
In other words, recognize that you run the risk of losing most of your investment, if not all of it. A cryptocurrency has no intrinsic value apart from what a buyer is willing to pay for it at this point in time. This makes it very susceptible to huge price swings, which in turn increases the risk of loss for an investor.
Overall Conclusions: Considering which strategy is right for you depends on your approach and attitude towards investing.