In 2020, the COVID19 pandemic brought the world’s economy to its knees. Stock and crypto markets crashed, and confining ourselves in our homes led to a drastic decrease in spending. And in a consumerist society like hours, this was the perfect recipe for a recession. By mid-2020, every major economy in the world was experiencing it.

Two years after the fact, we are feeling the repercussions of the pandemic through 20-year high inflation. Food prices have risen by more than 5% in most developed countries, with the most unfortunate ones experiencing double-digit increases. As a result, purchasing power has considerably decreased with the average consumer. Additionally, we are facing unparalleled crises in the supply chain and energy sectors, which doesn’t fare well for putting inflation under control.

In this article, we will try to give you a rundown of the current state of affairs regarding inflation and teach you how to hedge against hyperinflation. To this end, we explore some crucial concepts of this phenomenon and provide a selection of assets to invest in. These could help you not only conserve the value of your capital but also increase it over time.

The Current State of Inflation

The pandemic and lockdowns took their foreseeable toll on the economy. Businesses closed, people lost their jobs, and understandably so, they stopped spending their money. The monetary policies adopted by governments to jumpstart the economy and give out a helping hand have had the reverse effect of what they were supposed to do.

Governments printed more fiat money than ever before and injected it into circulation. This inevitably watered down our money’s value, leading to higher prices and reduced power of purchase.

So could it be that we are facing hyperinflation? Before we panic, let’s first define the concept and its causes. This should give us a better understanding of why you should learn how to hedge against hyperinflation.

What is Hyperinflation and What Causes it?

Hyperinflation is an economic phenomenon that signifies an uncontrollable rise in prices, all sectors combined. Inflation itself occurs naturally in all developed economies, by a couple of percents yearly. During hyperinflation, on the other hand, prices can rise by more than 50% over a single month.

Note that hyperinflation usually occurs during extreme economical turmoil, such as recessions, or wars.  However, there are additional factors that can contribute to it.

Excessive printing of fiat currency

To respond to a recession, central banks print more money to accelerate the economy and encourage more spending. This was the case at the beginning of the pandemic when governments in various countries increased the money supply and gave away significant sums to individuals.

However, if there’s no economic growth, this additional money has the reverse effect. Companies raise prices to fight the recession and stay in business. Consumers, on the other hand, have more money to spend and follow the price increase. The increased demand raises prices even further, leading to the government printing more money, and so forth.

Suddenly, prices are rising faster than government money printing can follow, leading to hyperinflation.

Loss of trust in the monetary system

As a side effect of the prices rising, people can lose faith in their monetary system. If governments are unable to retain the value of our money, this leads to people abandoning fiat currencies and turning to hoard food and commodities. Supply shortages of basic necessities follow, increasing prices even further.

You can see how this vicious circle can get out of hand quickly. This is why it’s imperative to learn how to hedge against hyperinflation when you see some of these telltale signs.

Could Be Be Facing Superinflation Instead?

Considering that inflation rates remain well below 50% monthly, we can safely declare that hyperinflation is not upon us just yet. It occurs very rarely and there are sufficient monetary mechanisms nowadays in developed countries to prevent such an event.

However, the numbers are still quite worrying. The pandemic has caused major shortages in the tech industry, causing the prices of cars and everyday technology to skyrocket as high as 40% last year. The food supply chain has equally been disrupted, with basic necessities increasing over 10% in 2021.

Source: Visual Capitalist

While officials are talking about around 6% inflation, you should know that these numbers are calculated through decade-old methods, not fitting today’s economical landscape. The real impact is far more consequential, and the average consumer is already facing price hikes between 10% and 20% on average.

So instead of teaching you how to hedge against hyperinflation, let’s see what you can do about this superinflation that we are currently experiencing.

How To Hedge Against Hyperinflation

Even though it’s only natural to be worried, there are some proven methods on how to hedge against hyperinflation. Keep in mind that these usually involve some form of risk. You will need to convert your fiat capital into something that appreciates in value over time, and no investment is 100% safe. That said, your money is already losing its value at a speed not seen since the 1980s. Time might be of the essence, so let’s check some solutions on how to protect yourself against inflation.

Is Bitcoin the Best Hedge Against Inflation?

Cryptocurrencies and, more specifically, Bitcoin, have proven to be a very potent hedge against inflation. While many investors shun Bitcoin for its short-term volatility, the larger picture is much more appealing. In just over a decade, the price of Bitcoin has increased by a factor of 200.000, making it one of the best investments of the century.

Moreover, in addition to its increasing value, Bitcoin provides investors extra advantages that make it such a great store-of-value asset:

  • Flexible – you can own a fraction of Bitcoin and purchase as much as you can afford. This is in contrast to stocks, which you need to purchase as full units.
  • Easily transferable and transportable – due to its digital nature, you can easily send Bitcoins over the internet. Moreover, you can store loads in a simple hardware wallet that fits in your pocket.
  • No third-party involvement – finally, an important advantage of Bitcoin, is that it’s decentralized. This means that it doesn’t rely on a central governing body for issuance, distribution, or transfers. If banks fail, you won’t depend on them to handle your money.

With that in mind, you should be aware that Bitcoin remains a highly volatile asset, subject to cyclic bear markets. As such, it’s not the safest investment for short-term hedging, and it’s recommended for 5+ years investments.

How To Protect Yourself Against Inflation by Buying Real Estate

Many investors consider real estate as one of the best hedges against inflation, for multiple reasons. First of all, you can invest in various types of real estate (commercial, residential, industrial) whose price reacts differently to geopolitical events. This allows you to diversify within the same type of asset and reduce your portfolio dependence. Real Estate investment trusts (REITs) will allow you to do this quite seamlessly.

Other than appreciating in value over time, real estate can also provide steady income through rent, which also rises together with inflation. Operating expenses, on the other hand, don’t rise as fast.

And finally, investing in real estate triggers diminishing debt during inflation. As the value of the money reduces, so will the value of your loan. While the base value of the loan remains the same, this capital will be worth much less during an event of superinflation, allowing you to repay your credit at a discount.

That said, there are some drawbacks to buying real estate as well. Properties can become highly illiquid during inflation and selling them can be a problem if you are in dire need of cash.

Gold as A Millenia-Old Hedge Against Inflation

Gold has been around for millennia and has a special place in our society as a store-of-value asset. It has multiple uses as a currency, material for jewelry, and material for hi-tech manufacturing. As such, this precious metal is a widely accepted solution of how to hedge against hyperinflation. The reason behind this is that its value has been increasing steadily over the last couple hundred years.

The gold-to-suit ratio from Sionna shows us that historically, a decent men’s business suit has always cost an ounce of gold. For example, if a suit cost $34 in 1960, it now costs $1800. In both cases, the same price as an ounce of gold at the time. This simple comparison shows that gold manages to always come out on top of inflation.

That being said, while safe, gold doesn’t provide some of the advantages of other assets on this list. Its value increases very slowly and it doesn’t provide earnings like equity dividends or real estate can.

Commodities to Predict Inflation

This asset class encompasses various financial instruments that are worth mentioning. You can include essential foodstuffs (grain, meat, milk, etc.), oil, electricity, natural gas, precious metals, etc. which can all be a great indicator of upcoming inflation.

The reason behind this is that commodities are often used as raw materials for producing consumer products. For instance, if the price of grain increases, it will be a precursor to bread prices increasing as well. This correlation between inflation and commodities has been conserved for centuries, allowing for a surefire method of hedging against it.

However, like with every investment type on this list, there’s a catch. Commodities are highly volatile and are extremely dependant on geopolitical events. For instance, political tensions like current Russia’s reluctance to provide gas to the EU can cause prices to skyrocket.

This is because commodities are closely linked to the laws of supply and demand. Shortages can increase prices significantly, while overabundances can make prices plummet.

60/40 Stock/Bond Portfolios for Safe Capital Appreciation

A mix of stocks and bonds to the 60:40 ratio is considered to be one of the safest hedges against inflation. Stocks provide volatility and have the potential for capital appreciation, which counterbalances inflation. Bonds, on the other hand, provide fixed income to offer some risk mitigation to the volatility of stocks.

Worth noting is that different countries react differently to inflation. This means that adding stocks and bonds from different countries can help you diversify on an international level and reduce your dependence on a single geopolitical entity. Thankfully, the advent of the internet has made international investments a lot easier in the past couple of decades.

In the last 40 years, this type of classical, safe portfolio has produced between 8 to 9% gains on average. Which is a sweet spot for conserving capital value considering the current superinflation rates.

While the effectiveness of this method has been diminishing in the past few years, it still remains a headache-free method on how to hedge against hyperinflation.

Cryptocurrency Lending for Fighting Superinflation

Cryptocurrencies have given birth to a new way to lend and borrow money. Today, you can lock your crypto capital on various platforms that will yield you between 5 and 10% APY. What’s more, there are various solutions for every type of investor.

For instance, if you aren’t too savvy about how cryptocurrencies function, you can use a beginner-friendly centralized platform like Celsius or Blockfi. You won’t even have to buy Bitcoin or other cryptocurrencies, as these platforms will provide an easy on-ramp through stablecoins.

Crypto-conscious investors, on the other hand, can use the DeFi market that will provide even higher yields, albeit with increased risks. In either case, lending crypto is a sound strategy on how to hedge against hyperinflation, considering it will generally outperform price increases to up to 15%.

Again, the drawback of this method is that cryptocurrencies can be highly volatile. Moreover, higher-yield coins will usually present much higher risks in the long term. These still haven’t made a name for themselves in the extremely competitive crypto markets and might result in a total loss of funds.

Conclusion

In this article, we gave a quick overview of the current state of the economy and why we think that the current inflation rates might continue to rise. This gave us a good reason to provide you with some foolproof methods on how to hedge against hyperinflation, including investing in:

  • Bitcoin
  • Real Estate
  • Gold
  • Commodities
  • Stocks and Bonds to a ratio of 60/40
  • Cryptocurrencies for lending

To put it simply, our money is losing value. While this superinflation might be transitionary, financially conscious individuals should work towards diversifying their capital throughout some of their assets included in this article. Even if the price hike stabilizes, these investments might be worth your while and increase your savings considerably.