Is cryptocurrency a good hedge against inflation: What you need to know

Kang Wan Chern
Assistant Business Editor

6 April 2022

SINGAPORE - Cryptocurrency reached a tipping point in 2021, evolving from a niche investment to a "global, established asset class", according to findings in a report by crypto exchange Gemini.

Cryptocurrency market capitalisation almost hit US$3 trillion (S$4.1 trillion) last year, with tokens like Bitcoin touching a record high of over US$65,000. That makes crypto the best-performing asset class of the past 10 years, Gemini said in the report released on Monday (April 4).

The exchange surveyed nearly 30,000 adults aged between 18 and 75 with yearly household incomes of US$14,000 or more across 20 countries. Around 1,200 of the respondents were from Singapore. The survey was conducted online between Nov 23, 2021, and Feb 4.

It found that 30 per cent of the Republic's population owned crypto as at Dec 31, 2021, which is higher than in Hong Kong, the United States, Australia and other developed economies with stable currencies.

While 7 per cent of non-owners said they are likely to purchase crypto this year, more than half of those polled who did not own crypto cited the fear of losing money through their investments as a major barrier to crypto adoption.

As awareness rises, The Straits Times spoke to experts about the uses and risks of cryptocurrencies.

1. Is cryptocurrency a good store of value?

Cryptocurrencies are increasingly being seen as a store of value and hedge against rising inflation, said Mr Feroze Medora, interim managing director at Gemini Apac.

According to the Gemini report, inflation was a primary driver for crypto adoption in 2021. In Singapore, even with its stable fiat currency, more than two in five cryptocurrency investors turned to crypto for its inflation-hedging properties.

The vast majority of crypto owners globally said they buy and hold cryptocurrency for its long-term investment potential, while more than half of crypto owners in the Asia-Pacific reported actively trading cryptocurrency as a way to achieve profits.

2. What else is cryptocurrency currently being used for?

Crypto is rising in relevance as a means of payment.

Last month, shoe retailer Charles & Keith began accepting cryptocurrency as a payment mode on its e-commerce site. Singapore yacht charterer Yacht Bookings and local luxury travel agency The Wander Clan this year also started accepting crypto payments through TripleA, which received its payment licence from the Monetary Authority of Singapore in November 2021.

For now though, the volatile price movements of Bitcoin and other cryptocurrencies impede their widespread adoption as a form of payment, said UOB head of markets strategy Heng Koon How.

Mr Raks Sondhi, managing director of Independent Reserve, which is the first regulated cryptocurrency exchange for all investors in Singapore, noted that crypto is also being used to earn passive income, a process called staking, and as a digital form of ownership in unique assets such as art or music.

Mr Medora said cryptocurrencies are "powerful tools" in international money transfers. For example, US dollar-backed stablecoins can be transferred into a recipient's crypto wallet at a fraction of the time and cost of traditional remittances.

3. What are the risks of owning crypto?

While crypto is gaining traction as a new asset class, Mr Heng warned that it still has some way to go as a reliable store of value.

"For an asset to be a reliable store of value, one of the key prerequisites is to have a predictable price range with minimal volatility," he said.

Bitcoin, which is the most liquid cryptocurrency, has a year-to-date 30-day volatility swing of 40 per cent to 70 per cent, he said.

In comparison, traditional stores of value fare much better, with gold swinging 10 per cent to 20 per cent, and the Dollar Index from 5 per cent to 8 per cent.

Apart from the high volatility of prices, experts said other risks include losing the private keys to your crypocurrency as well as fraud or theft.

Still, Mr Medora said: "The volatility of crypto has been gradually declining in the past few quarters. The fact that it started in 2009 and has grown to the market capitalisation that it is now, suggests that it is here to stay."

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