How to Save Money from Inflation with Cryptocurrencies

You may have been saving and trying to be frugal, and as a result, you now have a nice amount in your bank account. You've gone one year without touching this money, and now when you go to the store, that same amount will buy you less than it did a year ago. This phenomenon occurs due to inflation, and it quietly erodes the value of your savings.

You may look at reports showing one thing in terms of numbers, but when you go to your local store and see the price of items increasing and how far your money really goes, you will understand that there is a disconnect between reports and reality. Since your traditional methods of saving for the future (such as savings accounts or certificates of deposit) cannot keep up with inflation, many people turn to alternative solutions for protecting their savings. Cryptocurrencies have recently gained popularity as an alternative to traditional savings methods. But should you use cryptocurrencies to protect your capital? Are cryptocurrencies a real solution to protecting yourself against inflation, or just a fad that comes with too many risks?

This article will seek to analyze this area without being overly emotional. There will be no hyperbole stating, "cryptocurrency will save the planet," or hysteria police saying, "it's all a bubble." Only the facts, logical reasoning, and practical suggestions presented here with a human face on your finances.

What is inflation, and how does it "devour" your savings?

Inflation is a concrete concept. For example, if a loaf of bread cost 50 rubles yesterday, it will cost 55 rubles this month and 65 rubles in six months. You may feel like your wage has increased over the year—however, in terms of what it now buys you, your purchasing power has decreased. Simply put: the total amount of money you have has not changed, but your purchasing ability for goods and services has decreased.

Inflation has many different definitions. One of the simplest and most straightforward ways to define inflation is by using the Consumer Price Index (CPI). The CPI measures the dollar value of an imaginary basket of goods (such as food, utilities, transportation, and clothing) that the average American family buys over time, as well as how those prices will change. Although there are more sophisticated methods of measuring inflation, including the GDP deflator, the Consumer Price Index provides the best visual reference point for what Americans experience on a day-to-day basis.

You should also be aware that inflation does not always happen at the same rate. Historically, the average rate of inflation has been between 2% and 4% per year; this means that as the economy grows, savings do not lose enough value to prohibit that accumulation of wealth. However, once inflation reaches a level of 10%–15%, things turn into a different type of race. Prices are growing faster than wages, and people will start seeking to keep at least the amount they presently hold, in the event of rampant inflation.

During these times of inflation (10% or higher), investors begin paying closer attention to investment types that are theoretically capable of keeping pace with inflation. Cryptocurrencies fall into this category; however, just like any other investment, understanding the processes of how they work and what possible pitfalls may lie ahead of you is very important to avoid "buying and hoping" without making an informed decision.

Cryptocurrency is not a magic cure-all; it is merely a tool like any other tool. When it comes to using cryptocurrency as a financial instrument, it is extremely important that you understand the technology behind it so that it can work for you and not against you.

Bitcoin is often referred to as "digital gold." The reason for this is obvious. It has an important feature that gives it a unique identity compared to traditional money, which is its limited supply. Its total issuance is 21 million coins, and that's it. No one can create a bitcoin like central banks do with fiat currencies. While this does not mean that the price of bitcoin will increase, the fact that its supply is limited makes the bitcoin economic model more likely to be able to resist inflationary devaluation. This will create a situation where, because of the demand for bitcoin increasing and its limited supply, the price of bitcoin should be increasing in the future. This is one reason bitcoin is often thought of as a long-term value preservation tool.

However, there is a downside to this aspect of bitcoin's value, and that is its volatility in the short term. The price of bitcoin may rise 30% in a week and fall 25% in the following three days. As a result, bitcoin is not the type of asset to hold for a rainy day or when you may need cash in an emergency; instead, it is better suited for a portion of your investment capital that you are willing to hold for at least several years.

Unlike bitcoin, which is mainly a "store of value" asset, Ethereum and other altcoins are not just stores of value; they also provide much greater functionality than bitcoin. These functions include smart contracts, decentralized apps, staking, and participation in project governance. This provides added value to these altcoins, but it also causes these assets to be much more complicated to understand and trade than bitcoin.

The volatility of the price of altcoins is typically higher than that of bitcoin. This means that the amount of profit you can generate from an altcoin may be very large; however, it also means that the chances of losing money on an altcoin are much higher. Therefore, if you are just starting to learn about the cryptocurrency markets, it is advisable to concentrate on the major cryptocurrencies first before you expand your focus to the smaller niche projects as your knowledge base grows.

Stablecoins (like USDT, USDC, etc.) are pegged to the dollar or the euro in terms of value. They offer a way to quickly transfer funds, trade and temporarily "park" your money within the crypto system. However, when it concerns protecting against inflation, stablecoins only partially achieve this: if the dollar (for example) loses value, the corresponding stablecoin will also lose value.

That said, stablecoins can be useful in a trading strategy; one example would be keeping your profit locked in after Bitcoin appreciates while not withdrawing the funds into fiat currencies, thereby eliminating the delay of going through banks or exchanges.

How the Value of Cryptocurrencies Can Help with Inflation

In thinking about how to deal with inflation by investing in cryptocurrencies, it is important to differentiate between the following two scenarios:

Scenario 1: The long-term perspective
Over the course of 3–5 years, by purchasing Bitcoin or Ethereum and not responding to short-term fluctuations, an investor can expect that the value of his/her asset will increase faster than inflation. Historically, there have been several long segments of time during which this has occurred, but of course there is no guarantee of future performance based on historical performance.

Scenario 2: The short-term speculative approach
The speculative approach is no longer considered a way to escape inflation. It is simply active trading. There is the potential for making money, but also risk of losing a significant portion of your investment. Investing based on this strategy requires time, knowledge, discipline and, honestly, nerves of steel.

Because of the above circumstances, the majority of individuals seeking to preserve their savings would be better served following the first strategy (invest in high-quality assets, dollar-cost averaging, and holding for long periods).

Analytical tools such as ASCN.AI are extremely useful for these types of strategies. They aren't providing you with a straightforward answer such as a "buy now"; rather, they will guide you through the evaluation of current market trends, determine the market sentiment and aid you in making informed purchasing decisions based on facts rather than emotions. For instance, a member of the community was able to effectively identify an arbitrage opportunity during a major spike in volatility and subsequently realize a profit as a direct result of the opportunity, due to his proper analysis, not simply because he got lucky.

How to Begin with Minimal Risk

Start out Small & Simple

You can start off purchasing only a portion of your total investment rather than attempting to purchase multiple assets all at once. You should begin by purchasing the amount of money you would be comfortable with losing. It is advisable to purchase 1 or 2 cryptocurrencies (i.e., Bitcoin or Ethereum) as these two assets represent the least risk and will allow you time to familiarize yourself with the market's mechanics.

Diversify, but Don't Go Overboard

The expression "don't put all your eggs in one basket" applies to both stock and cryptocurrency trading. However, to diversify your portfolio does not mean to purchase 20 different coins simply for the sake of diversification; it would be wise to have 3 to 5 highly reputable currencies with proven success records than to spread your investments too thinly among unproven projects.

Example of a Balanced Portfolio:

• 60% to 70% — Bitcoin: this will serve as the base anchor for your investment portfolio.
• 20% to 30% — Ethereum: due to its technology, Ethereum has much potential and would serve as a foundation of your portfolio.
• 5% to 10% — Promising Altcoins or Stablecoins: these types would provide flexibility in your overall investment strategy.

Use a Dollar-Cost-Averaging (DCA) Technique

The DCA strategy involves purchasing small quantities of a particular currency on a regular basis (e.g., 5000 rubles once per week); by using this method, you can accumulate a large quantity of a certain currency over time without attempting to speculate on when the price will reach its lowest level (i.e., by determining when to buy). In order to take advantage of the best prices, it is important to reduce stress levels, and not purchase everything at once.

Storing Your Cryptocurrency

If you are going to be holding your cryptocurrency for the long-term, do not store it on an exchange. Use a hardware wallet, such as Ledger, Trezor, or SafePal. These are physical devices that allow you to store your private keys offline. While these are somewhat less convenient than leaving your crypto on an exchange, they give you much greater security.

Risks and Constant Monitoring

The crypto market follows its own rules. Anything from regulatory changes, to technical improvements, to macroeconomics, can affect the price of a cryptocurrency. Tools like ASCN.AI are helpful in tracking these variables in real time, but ultimately, it is your responsibility to choose what to do with your cryptocurrency.

Be Honest and Sincere About Risk

Cryptofinance can serve as an effective hedge against inflation, but if you don't understand risk, you could be betting against yourself.

• Volatility. As the crypto market is extremely volatile, this means that the value of your cryptocurrency could swing in value by 10's or even 100's of percent within days. Investors should be cautious of using the value of cryptocurrency as a store of value or as something they could use to pay expenses if needed.
• Regulatory Risk. While the laws in your country may not change from one day to the next, those same laws may be updated or downgraded to be more restricting within a relatively short period of time. There is no guarantee that the governing body in your country will create laws allowing for the use of digital assets.
• Technical Risk. If you are holding your digital assets in an account on an exchange, there is an additional risk of the exchange getting hacked or phished. You might also lose your access to your ledger wallet due to forgetting your password. Hence, security is not just a best practice, but is also required for the continued viability of your digital assets.
• Psychological Risks. An investor's two greatest enemies are the fear of missing out (FOMO) and panic. Too much fear of missing out the opportunity can lead the investor to invest in a new coin just after it has rallied to the upside and panic can cause an investor to panic sell his or her investments. Rather than relying on intuition, it is imperative to create a plan and exercise discipline.

The risks associated with this can be mitigated via stop-losses; hedging; regularly re-balancing one's portfolio; and most importantly through education. The more one comprehends the cryptocurrency market, the less they will depend on luck to succeed.

When viewed in conjunction with investments in other asset classes, cryptocurrencies must not be viewed solely as a potential solution to inflation. Instead, the wisest approach is to incorporate cryptocurrency as part of an overall strategy that may offer higher returns while simultaneously reducing risk.

Example Assets

When developing an ideal portfolio, investors should focus on a balanced approach instead of just picking one single asset. Therefore, investors may want to consider including cryptocurrencies in their overall portfolio strategy, but they should not supplant other asset classes.

Frequently Asked Questions

Q: If Inflation decreases, will cryptocurrencies still be relevant?

A: Absolutely. Inflation protection is just one aspect; cryptocurrencies also provide access to digital technologies, decentralized systems, and opportunities for increased wealth via Technology Advancement.

Q: How much should I invest in cryptocurrencies to begin investing?

A: Only invest what you are willing to lose, and you can start with as little as 500 to 1,000 Rubles. The biggest factor is not how much you buy but how well you understand the process of buying and how much discipline you have when investing.

Q: What should I do if I bought something when it was high and it is now low?

If your investment was made with a long-term view—then don't panic about the drop in value. Drops are normal in investing. But if you need to access your money in a hurry—crypto may not be the right vehicle to invest with for that part of your capital.

Q: When is the right time to sell?

There is no guaranteed sign to know when to sell. But if an asset has dramatically increased and is making up a significant portion of your total portfolio; it may make sense to sell part of your gain to rebalance your portfolio back into balance.

Cryptos are not a magic cure-all for every single issue or problem that an economy will ever face. And they also are not a mere "bubble" that is going to end tomorrow. They are an emerging asset class with its own set of opportunities and risks.

If you're looking for a way to attempt to protect your savings from inflation—crypto may be a partial solution based on:

• Clearly understanding what you're investing in;
• Diversifying risk within your portfolio;
• Not using your entire savings amount;
• Having patience and not reacting to the "market noise".

There are also many tools available like ASCN.AI that can help you make more educated decisions but will not replace your thought process; they're intended to augment that process through the use of data and analytics. The ultimate decision, however, remains yours.

One of my key pieces of advice would be to not look for the "perfect time" to get in, but instead look to create a "long-term strategy" for your investment. The market is always going to fluctuate. It will be your responsibility to create a path that gets you the results you want.