Can Cryptocurrency Be Used as a Viable Hedge Against Inflation and Geopolitical Uncertainty?

With signs of inflation and geopolitical uncertainty relatively common across much of the world, investors are seeking new ways and methods of preserving wealth and fortifying their portfolios against these threats. While the old ways of hedging are still perfectly viable, many investors are hailing some cryptocurrencies as viable and useful assets to help them hedge against inflation and geopolitical uncertainty.

Cryptocurrency has gone on an interesting journey over its relatively short lifespan. To start with, crypto was nothing more than a dream and an idea of decentralized financial freedom, and it quickly became, for the most part, a speculative asset that was mostly traded with the view to making short-term profits. Now, it seems that some investors are beginning to see crypto in a new light, and cryptocurrencies like Litecoin are being used as hedges against inflation and geopolitical uncertainty, and as value stores.

While many investors might still seek to use cryptocurrency as nothing more than a speculative asset, as more investors are seeking to use it to fortify portfolios against inflation and other undesirable processes, the very act of those investors using the crypto in such a way has an effect on how the overall market views it. For investors who are seeking to use crypto like Litecoin for either speculative trades or as a long-term hedge, having an accurate picture of the LTC to USD price is an important part of the process, as it can help them to make more accurate choices about how cryptocurrency can fit within their portfolio.

Let's take a closer look at what exactly a hedge is, why cryptocurrency might be a reasonable choice as a hedge against inflation, whether or not Litecoin is relevant in this discussion, and at the changing nature of cryptocurrency.

What Exactly is an Investment Hedge?

A hedge, in investment terms, is an asset or investment that is added to a portfolio purely for the purpose of shielding the overall portfolio from expected or potential losses elsewhere. They are most sought after when economic instability seems to be likely, although hedging is a practice that can occur at any time with investments.

There is a range of assets that have been considered as excellent hedges against inflation and geopolitical uncertainty for a long time. These include things like government bonds and gold, assets that are likely to hold their value regardless of broader market movements or sentiment. Some investors are looking seriously at some cryptocurrencies as being in the same class as these other assets, but not all cryptocurrencies fit the bill. In order for a crypto to be a reasonable hedge asset, it must be able to preserve its value regardless of broader market movements and have a reasonable strength of value to start with.

Can Cryptocurrency Really be a Good Inflation Hedge?

The short answer is yes, but. As we said above, definitely not all cryptocurrencies should be considered as a good hedge against inflation or for anything else, but some of them, especially the earlier crypto models, have a number of characteristics that lend themselves towards being excellent stores of value. One of the key things that some cryptocurrencies display, which lends itself towards being a good hedge asset, is tied to their very design. We're talking about scarcity.

Many of the early cryptocurrencies, such as Bitcoin and Litecoin, were created with a fixed maximum supply. This means that there can only ever be a certain number of them, which means that they can never suffer the same sort of inflationary issues that regular fiat currencies do. Some analysts have even drawn the comparison between cryptos like Bitcoin and Litecoin to digital gold and digital silver, respectively, in terms of how well they expect them to hold value.

Another reason why many cryptocurrencies are seeing increasing interest as hedge assets is, paradoxically, because they are being viewed as hedge assets. As more investors turn to crypto as a potential store of value and hedge against economic uncertainty, the market movements of those cryptocurrencies reflect that sentiment, and increase the value of those assets as hedge potentials.

How Does Litecoin Stack Up?

For investors investigating various cryptos as hedge assets, there are a few that are likely to draw the eye. Bitcoin is one of the more dominant cases, but following close behind is Litecoin. Unlike Bitcoin, Litecoin has somewhat more functionality and operates with faster speed and lower fees than Bitcoin does, which has helped Litecoin to remain, if not in the spotlight, relevant, amidst the broader crypto market.

However, while it might be described by some as digital silver, its price movements do tend to match those of the broader crypto market, meaning that it might not always function well as a value store or as an asset that has an independently consistent value. But that doesn't mean it can never be a good hedge asset; it just means that its effectiveness as a hedge is heavily influenced by the broader market trends. In short, if the majority of the market considers Litecoin as a good hedge asset, then it will function well as one.

Final Thoughts

For the most part, cryptocurrencies like Litecoin can function as a hedge asset, but not necessarily at the same strength or confidence as some of the more traditional hedges, like gold or real estate. However, if the broader market sentiment changes and Litecoin, or any other cryptocurrency that has the right qualities, becomes more widely adopted as a hedge asset, then they are likely to function quite well in that capacity.

Cryptocurrencies have changed a lot over their short existence, and many analysts and investors seem to think there is plenty of room for more change, perhaps even into powerful tools to protect against inflation and geopolitical uncertainty.