How Stablecoin Innovation Could Offer a Hedge Against Inflation

Industry insiders once touted Bitcoin as an inflationary hedge, but economic reality has called this logic into question. Can a stablecoin provide the solution that Bitcoin can not?

Today Bitcoin is trading at $19,686, down 71.4% from its all-time high of $69,044 last Nov. With many countries around the world experiencing inflationary problems, the expectation would be that the price of Bitcoin should be rising. That simply is not happening.

Has Bitcoin failed?

With inflation in the U.S. hitting 40-year highs, it appears as though Bitcoin has failed as an inflationary hedge. Instead BTC seems highly correlated to stocks, particularly technology stocks in the U.S.

This perception of Bitcoin’s failure is at once both right and wrong, and there is a slightly more complex answer to be found.

Steven Lubka, managing director of Private Client Services at Swan Bitcoin, offers a more nuanced take.

As Be[In]Crypto previously reported, Lubka explains that Bitcoin performs well against monetary devaluation or money printing. This is why the price of Bitcoin rose steadily throughout the COVID-19 pandemic when the U.S. government was printing lots of money.

Bitcoin performs less well against other types of inflation, such as when the price of goods rises due to supply chain disruptions, or scarcity caused by conflict. This second type of “inflation” is not true inflation, but to consumers it looks exactly the same.

It is a distinction that not everyone cares about, but Bitcoin holders should care, because it allows them to more accurately predict price trends for BTC. As for regular consumers, all they need to know is that their dollars, pounds, and euros are devaluing against the price of everyday food items and other purchases.

Enter the CPI-pegged stablecoin

One way to hedge against inflation could be for consumers to use stablecoins pegged to the value of goods. In theory, the purchasing power of these currencies would neither rise nor fall against items customers regularly shop for.

One company operating a stablecoin in this vein is Frax. The token they created for this purpose is the Frax Price Index Share (FPIS), and as you would expect, it is currently trading above the dollar at $1.39 per coin.

Sam Kazemian, the founder of Frax, believes this could be the next big idea in cryptocurrency. He calls it the non-state unit of account.

“I think the next largest sector in stablecoins will be the non-state unit of account,” Kazemian told Be[In]Crypto. “Stuff that’s actually stable to a basket of consumer items that people care about, so they can keep their standard of living the same.”

It’s a new and relatively young concept, but one which seems to already be growing in popularity. When we first spoke to Kazemian about a CPI-pegged stablecoin at the start of Aug, the market cap of FPIS was only a little above $60 million. Today it is within touching distance of $140 million.

Kazemian admits that the concept is still a little ahead of the market, but believes that over the next few years the idea will become widely accepted. In time, the founder even says that CPI-pegged coins could become “an alternative and successor to the state units of account.”

A compelling idea

For years consumers in the West have spent little to no time thinking about inflation. 

Today, that story is very different. The public is facing up to the fact that the value of their money is not what it once was. Offer them a form of cash that doesn’t devalue against goods over time, and you’ve got a pretty compelling sales pitch.

The issue for Kazemian and others is to convert that pitch into stablecoin users. It will be interesting to see how non-state units of account fare, and whether they can become one of the trends to drive the next crypto bull run.

The post How Stablecoin Innovation Could Offer a Hedge Against Inflation appeared first on BeInCrypto.

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