We are witnessing very turbulent times for wealth creation. We are also experiencing this amidst high inflation, rising interest rates and stagnating wages. In facing this reality, is cryptocurrency a viable solution to revive struggling economies around the world and support broader economic development, or is it just as old as we’ve seen before? Another scenario doomed to a cycle? Could cryptocurrencies really be a viable hedge against inflation and decentralized finance (DeFi) a practical complement to help stabilize an imperfect financial system? ? Let’s explore some of the cycles and trends that could help clarify what the future of finance will bring to the world.
alternative financial instruments
Annual inflation in the US accelerated to a whopping 9.1% in June this year, the highest in 40 years. This is while food and gas prices continue to rise, and the homeowner’s interest rate is now above his 5% on a 30-year fixed-rate mortgage. As Larry Summers explained, stagflation is the perfect storm of slowing GDP growth combined with rising inflation to produce long-lasting effects. The U.S. economy contracting his 1.4% in the first quarter of 2022 could be a harbinger of this economic downturn. Combine this with the average APY for traditional savings accounts being 0.10% of his anemic, and the minimum wage hasn’t been raised at the federal level in over a decade. It builds on the economy and complements your investment.
Our current economy does not necessarily incentivize or reward traditional saving mechanisms in a way that responds appropriately to inflation. This is one of the reasons why DeFi has become so popular. For many, DeFi represents a more direct opportunity to grow wealth in a more accessible way than the traditional banking system. Investing in cryptocurrencies and digital assets can be a very interesting value proposition if you can get orders of magnitude returns from investing in them.
In his book The Changing World Order, hedge fund giant Ray Dalio describes economic cycles that repeat throughout history as opposed to changes in state power. When a country becomes the dominant world power, its currency becomes the world’s reserve currency. For example, the pound sterling once underpinned the world economy during the reign of the British Empire. However, the Bretton Woods Agreement of 1944 made the US dollar the de facto reserve currency of the world. Whoever was in charge at the time, one thing remains the same for him. That said, while inflation is on the rise, the easiest way for governments to deal with rising debt is to print more money. In other words, to inflate their exit.
Crypto as the next dominant cycle
While there has been much discussion about Central Bank Digital Currencies (CBDCs), there are already deflationary stablecoins in the ecosystem whose value may be pegged to collateral such as other cryptocurrencies or traditional assets. If so, what is the real benefit of a CBDC?? The whole idea of stablecoins is to provide a crypto asset whose value is extremely stable. Most stablecoins achieve this stability by pegging their value to a fiat currency such as the US dollar or a basket of assets including fiat currencies and cryptocurrencies.
Additionally, most stablecoin projects incentivize people to continue investing in the ecosystem by offering derivative versions of the assets they lock into liquidity pools, even if the primary asset remains locked. Allow investors to participate in other DeFi protocols. They can earn generous interest and still use derivatives to take out our loans or earn yields elsewhere, doubling their initial investment.
DeFi is providing new avenues for economic growth while empowering every individual, not just the ultra-rich. Rather than being pegged to a national currency, and instead with the broader development of an economy powered by cryptocurrencies, DeFi protocols will provide a generous amount of room for saving, earning, and borrowing, with little initial investment capital required. We can offer incentives.
Macroeconomics may be pushing us towards cryptocurrencies
In times of high inflation, alternative savings vehicles and assets such as cryptocurrencies become more attractive by offering investments that are not directly tied to the world’s reserve currencies. As the demand for these assets grows, they will become more valuable and more viable in other struggling economies around the world. Examples of this can be seen in Turkey and Venezuela, where their currencies remain unstable. This ultimately lends credence to the idea that cryptocurrencies such as Bitcoin will become legitimate players in the global economic arena. Recognizing a currency based on a decentralized currency is a major shift in the global macroeconomic model.
A decentralized system that allows individuals to transact directly with each other in a more efficient and transparent manner is a monumental new step in our approach to building a fairer and more inclusive global economy. With all that in mind, it’s reasonable to consider it to be one of the most viable solutions currently available for answering the fundamental question that inspired this article. History may not repeat itself, but it does rhyme – and Cipher seems to offer a completely different tune.
DeFi certainly offers people the opportunity to invest in deflationary assets with substantial return potential currently unseen in the traditional financial arena, and this could be a potential new avenue for creating generational wealth. If the past cycle continues, cryptocurrencies may be the best hedge against weakening fiat-based economic power. If talented developers continue to focus on removing barriers to entry, demystifying the DeFi experience, and making the cryptocurrency market accessible to everyone, we will continue to push cryptocurrencies forward and make them economically viable. We can help expand inclusion and development.