How to Use Alternative Assets as a Hedge Against Inflation
An increasingly digital world offers more options than ever before.
The concept of money and its value has been heavily debated for centuries. Until 1971, the United States dollar was pegged to gold, a shiny physical asset that individuals understood as having inherent value because it could be used in a physical sense. As we moved away from the gold standard, experts and citizens alike have asked the questions, “What makes something valuable?” and “How do we assign value?”
The rise of new asset classes like cryptocurrencies, NFTs, stablecoins and the like have raised the question of value once again and forced us to think critically about the next wave of the financial system. This is made even more pressing amid rising inflation rates and the loss of dominance of one of the most valued currencies: the U.S. Dollar.
Inflation and portfolio diversity
Another main concern surrounding money is inflation (a decrease in the purchasing power of money) at the hands of policymakers and circumstances such as economic crises. As of the summer of 2021, following the Covid-19 pandemic and its economic impact, inflation rates in the United States crossed a 13-year high.
As the rates of inflation increase, individuals are seeking more ways to secure their wealth. During this rise, purchasing additional assets to diversify your portfolio — a method of hedging against inflation — has been favored by both institutional and individual investors. Financial advisors are recommending diversification through gold and precious metals, stocks and bonds, and cryptocurrencies, such as Bitcoin and Ethereum.
A newer means of achieving diversification is through the purchasing of physical collectibles and luxury items. This is especially true for millennials since collectibles and luxury goods are means of value that they understand.
Back to basics
Designer handbags, expensive watches, high-end wine, sports cars and other exclusive collectibles are in extreme demand and oftentimes selling out across the country as consumers cling to what they understand in the physical world as a store of value.
Even amid pandemic-related unemployment, physical assets are being collected in mass quantities and held as both status symbols and as hedges against the current financial system.
However, as lockdowns across the globe lead to a sprint towards a fully decentralized and digital world, hedging against inflation through purely physical assets is not a safe bet.
Digital solutions for a digital world
Old-fashioned symbols of wealth and status do not hold the same gravitas in a world that is moving to the digital space. Who cares if you have a designer watch if people never see it? It may be good for an Instagram post or a couple of Snapchats, but is otherwise unusable for the increasingly digital world in which we find ourselves.
Instead, individuals should seek out digital solutions for wealth protection to fit our modern digital world. Technology advancements like cryptocurrencies and non-fungible tokens (NFTs) have the same inherent value — tied to scarcity — as these physical items, but bridge the gap to the digital world.
For instance, if you held on to a Rolex and were looking to liquidate that asset during the government-issued lockdowns in 2020, you would be out of luck as pawnshops and marketplaces were closed. Even using traditional wealth managers can be burdensome with large barriers to entry. However, if you had that watch represented as an NFT, you would have a fully functioning, 24/7 digital marketplace to trade that asset in a secure, efficient and cost-effective way.
By collecting and holding NFTs and blockchain-based digital assets like cryptocurrencies, individuals can protect their assets against the volatility of the fiat currency system while still having the ability to engage in marketplaces and DeFi to buy, sell, exchange and leverage their assets.
Entrepreneur Leadership Network Contributor