What’s the Best Cryptocurrency for a Fiat Hedge?
Prior to 2008, investors looking to protect their wealth from depreciation of fiat currency had the same options as they had for decades – precious metals, stocks, fine art, in-demand collectibles and the like. With the creation of Bitcoin this added another theoretical fiat hedge into the mix – cryptocurrencies. However, it wasn’t until the outbreak of the coronavirus pandemic in 2020 that investors really started to look at cryptocurrencies as a serious fiat hedge.
With that particular glass ceiling being broken then, let’s consider which cryptocurrencies would act as a good hedge to fiat currency. When considering what cryptocurrencies we can use as a hedge against fiat, we need to consider a number of factors.
Firstly, what exactly are we hedging against? Typically, the argument goes that fiat currencies lose value over time because central banks can print money whenever they feel like it. The past two years have been a perfect example of this as central banks have injected trillions of dollars into the economies of the world in attempts to keep countries going during the pandemic.
This rampant money printing has an impact. While you still get 100¢ for your dollar, the effect of flooding the market with money means that it loses its spending power.
Leaving money in savings is also pointless because interest rates are lowered to allow easy lending and borrowing for businesses. In situations such as this, investors turn to other means of looking after their money.
When it comes to cryptocurrencies that act as a hedge to fiat, we’re essentially looking for a coin that is the opposite of fiat; we’re looking for something that has a finite supply, isn’t too volatile, and is, in an ideal world, deflationary.
It should also be a coin that is known in the space for its fundamentals rather than being a coin driven by hype. With this criteria in mind, we have picked three cryptocurrencies that we believe could be the best option to hold if you’re expecting that money printer to keep going brrrrrrrr.
Bitcoin (BTC)
The original and best, in the eyes of many. Bitcoin wasn’t designed to be a fiat hedge, but it just so happens that it has all the qualities needed to be one. It’s no surprise Bitcoin enjoyed a bumper harvest during the recent years of money printing, and also why institutions were buying in like never before.
Firstly, there’s the name and the reputation. Most people, even if they don’t know about its fundamentals, have heard of Bitcoin. In the three years since the 2017 boom when it first really caught the world’s attention, people the world over and of all financial backgrounds had been learning about it.
It was therefore something of a known quantity, and more people than ever were sitting down to learn about how it actually worked and then buying in because of those reasons.
There are several reasons why Bitcoin is so well suited to being a fiat hedge. Firstly, there will only ever be 21 million bitcoin produced. This finite amount already marks it out as being different from fiat currency, which is printed ad hoc when central banks need more of it, and it adds an element of exclusivity and demand in the same way that a limited edition thing is more desirable than a mass produced thing.
Second, there is the issuer, or rather, the lack of one. Everything with Bitcoin is done by mathematics and has been predetermined – no one can come along and order the Central Bank of Bitcoin to create more. In fact, no-one actually ‘makes’ bitcoin, rather it’s released slowly into the ecosystem over time, and the amount released each time gets halved every four years.
This is another reason why it’s an attractive option compared to fiat currencies – everyone knows exactly how much bitcoin there will be in the system (aside from what has been lost) at any point from now until the end of time.
Of course Bitcoin isn’t the only cryptocurrency with these qualities, but its level of decentralization, the security of its blockchain, and the fact that it stands head and shoulders above anything else when it comes to trust and reputation with institutions as well as regular people makes it a standout contender.
It isn’t perfect, of course. One of the downsides to Bitcoin being a fiat hedge is that it is still considered a risky asset due to its perceived lack of intrinsic value.
In a world that is rapidly going more digital, most bankers, investors and, seemingly, journalists of Gen X and older seem to think that something only has value if you can hold it in your hands.
This outdated opinion has led to continued rants in mainstream media publications and online about how Bitcoin’s valuation is based on nothing but thin air.
Protestations from the Bitcoin camp about the numerous elements that make up Bitcoin’s market value have helped to some extent, but these negative theories still stubbornly persist and will do for some time to come. This, inevitably, puts people off.
Another issue with Bitcoin is its famous volatility. Bitcoin may be becoming less volatile over time, but it still experiences violent parabolic runs and collapses.
What good is a fiat hedge if you end up losing money? The idea is that over time as the crypto space gets bigger these swings will indeed reduce in volatility and the market cycles will be longer, but there’s no knowing when that will come. Bitcoin can still drop quicker than a rollercoaster, taking your stomach with it.
Second to this are concerns about regulation. Bitcoin is still unregulated in the countries in which it isn’t yet banned, and this has raised concerns in some quarters that it could yet be banned (or effectively so) by the likes of the United States.
While Bitcoin as a protocol cannot be banned thanks to computer code being protected under freedom of speech, Bitcoin transactions could simply be taxed so much that it puts anyone off from transacting in it.
While this is a theoretical possibility, the fact is that most governments are realizing that any such action will be counterproductive and that the genie is out of the bottle.
Governments are talking much more these days about creating frameworks within which the digital economy can flourish, which includes Bitcoin, and China-style bans will be unlikely, and almost unenforceable, in the majority of the world.
Another potential downside is that Bitcoin has recently begun to correlate with the major stock indices, highlighting the institutional adoption that has taken place in recent years.
We saw that Bitcoin crashed in March 2020 when the stock market did before mirroring its recovery, but, like the stock market, Bitcoin does not like a weak economy – if it had been around in 2008 it would have been one of the worst casualties of the financial crash.
Bitcoin has many elements needed to be a good fiat hedge, but it has a couple of crucial downsides to factor in when deciding where to put your cash.
PAX Gold (PAXG)
PAX Gold is a stablecoin from regulated stablecoin issuer Paxos, with each coin representing one fine troy ounce (t oz) of gold. Gold is of course the most famous of the precious metals and is well known as a fiat hedge. It’s no coincidence that gold’s last two parabolic moves coincided with financial crises, first the financial crisis of 2008 and recently the coronavirus of 202 and beyond.
Let’s first look at the fundamentals of gold as a fiat hedge before looking at PAX Gold in particular.
Gold is a known hedge against both a falling economy and inflation and has been for several decades, and as a result it is always in demand. There’s a reason most countries keep stockpiles of gold – it is known and respected the world over as having inherent value, even (or especially) in the darkest of times.
Gold bugs like to say that it is superior to Bitcoin on the intrinsic value front, but, of course, very few non-essentials have genuine intrinsic value – gold just happens to be appreciated for its lustre and the perception of value the human race derives from that.
Of course, gold used to be the benchmark against which the value of money was set, but ever since the various countries around the world came off the gold standard this correlation has massively distorted, which is partly why we are discussing the issue of a fiat hedge in the first place
Like Bitcoin, gold fits the bill as a fiat hedge because there is a finite amount of it in the world and one day it will all be mined, or at least all that can be accessed will be mined. However, this is only theoretical – if a huge gold seam was found tomorrow then the market could be flooded and this scarcity eradicated.
In fact, in August 2021 NASA identified an asteroid that it claimed contained enough gold to make everyone on Earth a billionaire. Of course, this wouldn’t happen as the price would crash to near zero, making a mockery of the idea of a fiat hedge. Such a scenario can’t happen with our other two candidates.
Gold also has the benefit of actually enjoying economic turbulence. Where Bitcoin would almost certainly suffer in times of global economic uncertainty, gold flourishes as investors run for a known safe haven. However, when the financial landscape is merely bumpy rather than explosive, Bitcoin tends to offer a better return.
With the fundamentals explored, let’s look at the PAX Gold token which offers exposure to gold through the crypto markets. Paxos has been running a dollar-backed stablecoin since 2019 and is one of the more respected stablecoin issuers in the crypto space.
What makes Paxos such a good option is the fact that each token is backed by one fine troy ounce of a 400 oz London Good Delivery gold bar which, if you’re so inclined, you can go and redeem in person yourself. This can be done through Paxos’ network of physical gold retailers worldwide and is a cheap and easy way to have exposure to the gold market.
Paxos’ gold is stored by BRINKS in an industrial-grade vault in London, while the PAXG token is tradeable on the world’s major cryptocurrency exchanges.
You can also buy fractions of PAXG on cryptocurrency exchanges rather than buying a whole bar’s worth, although it’s not clear if you can go and redeem your fraction of gold from a Paxos retailer or if they’ll simply laugh you out of the shop.
Paxos’ gold offering has been approved by the New York Department of Financial Service, which puts to bed any concerns over how official its 1-1backing is. For extra authenticity, PAXG tokenholders can enter the address of the wallet holding their coins to check the serial numbers of the gold bars they can lay claim to.
Overall, PAX Gold represents the easiest way to gain exposure to the world’s most recognized fiat hedge. Gold may be seen as the boomer’s Bitcoin, but there is a reason investors flock to it when times get tough, and with PAXG this became that bit easier.
Tokenized Assets
The third entry in our fiat hedge list isn’t a single cryptocurrency but rather a concept, of which several cryptocurrencies and associated platforms have arisen. This is the act of ‘tokenization’ – splitting ownership of everything from fine art to property into many pieces and selling them off to regular people who all retain a share.
Think of it as a timeshare only not sold by scammers (most of the time) which represents a way for regular people to own a slice of something special and protect their portfolios at times when cash is losing its cachet.
Tokenization has been on the fringes of the cryptocurrency space for a few years now, but it has really taken off in the last 18 months – artworks by Andy Warhol and Banksy are examples of assets to have been tokenized in this way recently, while an anonymous group nearly won an original version of the Constitution which they planned to tokenize.
Tokenization allows regular Joes to own slices of any kind of in-demand asset, with the result that assets that might offer a good alternative to depleting fiat, such as fine art and property, can form part of a portfolio without the whole thing needing to be bought.
As the space increases in scope this will allow investors the chance to diversify their portfolios into asset classes they may never have been able to afford before.
The idea of tokenization is nothing new, but there is a reason why it is only possible now. Blockchain technology has brought with it the ability to easily trade, transfer, and store digital tokens that provably denote ownership, making it impossible for someone to fraudulently claim ownership of that tokenized share.
Once a share has been purchased the token will be sent to the wallet of the buyer with everything visible on the blockchain, making ownership the work of a second to transfer and verify.
This is one of the great advantages of tokenized assets – rather than putting all your eggs into one basket you can divide up your eggs into lots of smaller baskets, reducing your risk.
As with everything cryptocurrency-related, there’s no guarantee that the person or platform running the tokenization event is not trying to pull a fast one by running off with the cash or tokenizing an asset they don’t really own, or even a fake. This is where doing one’s own research is paramount, although such an incident is yet to occur.
There’s also the issue of looking after the tokenized asset once it arrives, of making sure that the blockchain wallet containing it is well protected, but this is the same with any asset, physical or digital.
Buying tokenized assets is easy, involving sending the relevant amount in cryptocurrency when registrations open and waiting to take delivery.
Tokenized assets of course benefit from the value of the asset itself either holding value or increasing in value over time while the value of fiat itself degrades. A work of art from a famous artist for example rarely falls in value, which is why art is so sought after as an investment.
With tokenized assets being as easy to trade as any cryptocurrency there is the option of buying more shares should you wish or selling any you own in order to cash in.
Here, though, is one of the problems with tokenized assets as a fiat hedge. When it comes time to realize your gains, selling gold and bitcoin is child’s play, even in large amounts. With tokenized assets however, the liquidity pool could be very low by the time it comes to sell.
You may find that the only prospective buyers have placed low bids in the hope they can snag a bargain with no one willing to pay fair price, or you may find that the market is so small that there are literally no buyers at all.
And here’s another issue – just how do you value a tokenized asset? If you own a painting outright it’s easy to get an estimate, but if you’re holding a token related to a work of art and you want to sell it, do you have the right to phone Sotheby’s and ask them to pop along to wherever the painting is stored and get a quick valuation? If not, how do you know what your slice is worth?
The attractiveness of tokenization as a fiat hedge depends almost entirely on the asset being tokenized, and the tokenized asset world is currently so small that such events still make headlines. In theory however they represent a great way to diversify holdings and easily trade in and out when needed. There is no doubt that such enterprises will grow, but we must consider the fact that this is still a potential market rather than a fully fledged one.
And the winner is…
Before we give our verdict on the best fiat hedge, let’s recap what we’re looking for. We want a cryptocurrency that is finite, has a fixed supply mechanism, and is deflationary or as close to it as possible. It must also be something that can be swapped in and out of easily and, due to its underlying fundamentals, must at the very least retain its fiat value over time.
If history is our guide, PAX Gold is the cryptocurrency that best fits this bill. Gold has been used as a fiat hedge for vastly longer than the other two cryptocurrencies on our list and still does its job when markets are in a particularly bad way.
PAXG itself is backed by physical gold, giving it a definite tangible quality that will please those who don’t understand Bitcoin, and has all the certifications needed for buyers to know they’re getting the real thing.
However, gold’s market cycles are much longer than Bitcoin’s – after topping out in September 2011, gold took nine years to get back there again. If you catch the market at the wrong time it can be a long wait until you get your money back. Plus there’s that asteroid to think about…
Bitcoin doesn’t have to worry about an asteroid hitting the Earth and blowing its circulating supply out of the water – its total supply is finite and fixed, as is its rate of introduction into the ecosystem. It’s easier and cheaper to store and move than gold and its reputation as a fiat hedge has strengthened massively in the last two years.
However, it is still very volatile compared to gold and tokenized assets. This is good because if you time it right you can make a killing compared to your fiat holdings, but if you mistime it (or China bans it again) then you may be worse off than if you’d just held your fiat, and by quite a margin.
Tokenized assets are a fantastic creation whose time has finally come with blockchain technology, allowing anyone to own fractions of paintings, real estate, or in fact anything.
As the market grows you will be able to invest in assets you think will hold their value, collecting a portfolio that makes a mockery of falling fiat value and that slowly appreciates over time until you want to sell…which is where the problems start.
Can you guarantee that anyone will want to buy your tokenized shares at the going rate, and how can you get them valued anyway? You don’t own the asset so you are limited in your options, whereas with gold and Bitcoin you own them outright and you know there will be buyers.
Don’t forget too that you are entrusting a third party with security of the asset – what if it is stolen or damaged beyond repair?
In third place, then, we have to go for tokenized assets. The concept may be great, and indeed in a couple of years’ time we may be having a very different conversation, but the market is too new and too small to be a hedge to fiat. We wouldn’t be averse to snagging a share in an old master on the assumption that the market would support a sale when the time came, but it’s a big gamble at this early stage.
In second place we’ve gone for Bitcoin. It was a very close run thing, especially given Bitcoin’s fixed supply and the genius mechanisms in place to preserve the supply, but its volatile nature, its regulatory uncertainty, and its correlation to the stock market means that it’s not quite as robust as gold is, which is a key metric in our considerations.
In first place then we have PAX Gold. It may be the boomer’s choice of a fiat hedge, but with the addition of a properly regulated cryptocurrency you now have the best of both worlds.
Gold is great not just as a fiat hedge but also in times of financial crisis, and the ability to trade it on cryptocurrency exchanges, knowing that your coin is not going to suffer the fate of other cryptocurrencies should the markets collapse, is another tick.
Gold on its own would not have won this challenge, but with PAXG being the conduit it trumps Bitcoin and tokenized assets in the question of which is the best fiat hedge. However, with the cryptocurrency space continually developing, it’s doubtful that things will stay this way for much longer.
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Tokoni Uti
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