Capital preservation is a hot topic for all kinds of investors. Whether you invest in fiat or digital currency, you want to fully mitigate the risk of losing capital. This is when creating a wise capital preservation strategy comes into play. Where should I put my money during inflation? Does inflation affect cryptocurrency? Let’s dive deeper into the world of cryptocurrency and inflation and where you should put your money during inflation. 

What is inflation?

Inflation is the rate at which the cost of goods and services in the economy rise. When inflation occurs, the purchasing power of money decreases, meaning each currency unit buys fewer products or services. 

Inflation has vast economic implications. High inflation rates can affect central bank policies and consumer and business spending, discourage long-term financial planning, and erode the actual value of money. Controlled inflation is often considered a sign of a growing economy.

Before starting to plan your capital preservation strategy, it’s worth specifying the major types and causes of inflation, which are as follows: 

• Demand-pull inflation occurs when the demand for goods and services exceeds the supply, leading to a price boost. 
• Cost-push inflation occurs when businesses increase the prices of their goods and services due to increased production costs, thereby passing these costs on to consumers. 
• Wage-price (built-in) inflation is caused by worker expectations of rising wages to cope with the rising living costs. 
• Monetary inflation is caused by an increased money supply that outpaces economic growth, decreasing the currency's value and price growth. 
• Hyperinflation is an extreme and rapid inflation with very high rates, often resulting in a loss of confidence in the currency. 

The effect of inflation on investments

Inflation can significantly impact your crypto investment portfolio. Different investment assets react to inflation differently, and understanding those behaviors is one of the critical factors to consider while working on your capital preservation strategy.

• Inflation has a mixed effect on stocks—it can boost company profits due to higher prices or impact earnings due to decreased consumer spending. In moderate inflation, stocks typically perform well. However, challenges may arise in higher inflation scenarios. 
• Bonds are more sensitive to inflation than stocks. With high inflation rates, bond prices fall due to diminished bond payments. Long-term bonds are especially vulnerable to inflation. 
• Real estate property prices usually increase with inflation, making such investments more profitable during periods of high inflation. 
• Commodities like gold and oil can also benefit from inflation. These assists are often considered a store of value that protects against the erosion of purchasing power during periods of high inflation. 
• When it comes to cryptocurrency and inflation, the value of digital assets is not impacted much, mainly due to the unique characteristics of cryptocurrency. 

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Does Inflation Affect Cryptocurrency?

During inflation, crypto acts differently from fiat money. Unlike traditional currencies, the crypto market is characterized by its decentralized nature and dynamics of crypto assets, making it less vulnerable to inflation. However, this does not mean that inflation has no impact on cryptocurrency at all.

A common scenario when crypto prices are affected by inflation is the increased demand for digital assets when the purchasing power of traditional money is reduced. Due to their decentralized nature and limited supply, crypto coins can be considered a hedge against inflation. Increased demand causes crypto prices to rise. 

On the other hand, opportunistic sentiment can have an impact on cryptocurrency during inflation. When fiat money loses its value, people are more inclined to keep their funds, including digital assets, making them more willing to sell their holdings. As soon as many crypto investors start selling their digital funds, crypto coins start losing value, resulting in a drop in crypto prices. 

Market sentiment and investor behavior also significantly impact cryptocurrency prices during inflation. On one hand, cryptocurrency prices can grow when investors deem digital assets a hedge against inflation and bring more capital to the crypto market. On the other hand, crypto prices can fall if investors lose confidence in the stability of digital assets and start massively selling their holdings. Other factors such as market volatility, technological advancements and regulatory developments can also affect cryptocurrency prices during inflation.

Additionally, not all crypto assets react to financial inflation in the same way. Well-established digital assets with a large capitalization and widespread adoption, like Bitcoin, are more likely to benefit from increased demand during inflation. Newer crypto assets with a smaller market capitalization may be more vulnerable to market sentiment and changing investor behavior. 

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Investment in Stablecoins - Effective Capital Preservation Strategy

Stablecoins are now the preferred investment solution for people seeking less risky crypto investment opportunities. Backed by the US dollar or gold, stablecoins maintain their prices at more or less the same level, holding reserves with a value equal to the number of tokens available.

Investors may consider stablecoins as a means of exchange that can be accessed internationally, with transactions hitting the destination wallet in seconds. Besides, as an investment option, stablecoins are preferred to fiat currencies and commodities like gold for the following reasons: 

• Lower transaction fees and faster transaction speed compared to traditional banking.
• Since the price of stablecoins is backed by the underlying assets, they are less likely to be affected by inflation because their price is proportional to inflation.
• Stablecoins are digital assets that are accessible to everyone with an internet connection. They can be bought and sold at any time. 

Stablecoins are especially useful for people living in countries where hyperinflation has made their local currencies a dangerous form of money. These include Turkey, Argentina, Ethiopia, Lebanon, and Zimbabwe, with a whopping monthly inflation rate of 50%. Rather than holding their funds in fiat money, people can invest in stablecoins like USDT and BUSD to protect their capital from hyperinflation. 

Capital preservation in the form of stablecoins allows users from countries with hyperinflation to protect their funds from inflation by holding them as stablecoins. Besides, they can make their shaving more profitable by benefitting from the underlying peg. 

Where to Put Money During Inflation?

Crypto behaves better during inflation than fiat money. Although some crypto assets have failed because of fraud cases and security issues, many other digital assets have proven to be a wise investment opportunity for people looking to preserve their funds or even monetize their investments during uncertain periods of inflation. 

When developing your capital preservation strategy during inflation, consider holding your funds in well-established assets such as Avalanche (AVAX), Polygon (MATIC), BTC, and ETH. These are several of the best crypto investment choices for the long term. In addition to holding funds in cryptocurrency, you can also use tools like staking to generate a passive income from your investment. 

If you are more interested in capital preservation during inflation, consider holding your funds in stablecoins. Assets like USDT and BUSD are more inflation-resistant, mainly because these are pegged to the US dollar. 

According to historical data, it can be a wise capital preservation strategy to invest in cryptocurrency now while trading close to significant support levels and keep them as an inflation hedge.

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