1: Low-interest debt:
Inflation favors borrowers because you can pay back your debt with money that is worth less than when you borrowed it. With mortgage interest rates at around 3% and (official) inflation around 7%, lenders are paying you 4% to borrow money. A 2% auto loan is a no-brainer. Business debt is also cheap during high inflation.
What is the break-even interest rate that makes a debt worthwhile? That depends on whether you get a higher risk-adjusted return on your debt than the interest you pay on debt. For example, a 20% credit card balance is unlikely to pay off. A 9% interest loan is about equal to the return from the stock market
, but the stock market could go into a recession, causing you to lose your principal, so it’s not worth the risk unless the return on your investment is much higher than 9%.
Stocks are a hedge against inflation because they represent ownership of real assets. However, because inflation is the central planning of capital markets
, periods of high inflation mean business failures, recessions, and thus lower market returns. Growth stocks (startups and other businesses with cash flows that are expected to increase) tend to do much worse than value stocks (businesses with established cash flows).
The two-year return of the S&P 500 is 45.40%. Unless you believe that the economy grew by nearly 50%, this is strong evidence that a lot of the money created during the pandemic was absorbed by the stock market, and so stocks will continue to be a hedge against inflation.
Bitcoin savings protect against inflation because it has a hard limit of 21 million bitcoin
, with over 90% already created. A fixed supply of Bitcoin paired with an ever-growing supply of dollars means a high probability that Bitcoin will continue to appreciate. Furthermore, as concern about inflation grows, more and more will come to see Bitcoin as a solution.
Warning: Don’t confuse “crypto” with Bitcoin. “Crypto” is a catch-all for all decentralized cryptographic tokens, which solve many different problems. Many are meme tokens with no fundamental value. While their short-term returns have sometimes beaten Bitcoin, it’s questionable which tokens would survive a recession. Bitcoin was specifically created to provide a sound money alternative to fiat currencies to protect us from monetary manipulation.
4: Stablecoin lending:
A “stablecoin” is a digital token pegged 1 to 1 to a fiat currency, such as the dollar. Stablecoins are redeemable for dollars because they are (usually) 100% backed by dollars. Holding stablecoins is like holding dollars, so it does not protect your savings per se, but stablecoins can earn an income through crypto lending.
Crypto-lending works like this: when a Bitcoin (or crypto) holder needs cash, he can either sell the Bitcoin or take out a loan using his Bitcoin as collateral. Selling Bitcoin requires paying capital gains taxes and losing the potential for future gains. But taking out a loan is not a taxable event, and allows the borrower to benefit from rising prices. Crypto loans are over-collateralized and automatically liquidated if the margin requirement is not met. This means that, unlike bank savings, stablecoin lenders face no default risk. If the Bitcoin price falls below a certain threshold, the Bitcoin collateral is sold, and the loan is terminated.
As a stablecoin lender, you do not face any of the volatility associated with cryptocurrencies, though you must trust the lending platform not to lose or run away with your money. Today, platforms like Celsius Networks
have tens of billions of dollars under management, and in my opinion, are safe places to earn interest on your cash.
With that said, stablecoin interest rates are around 9-10%, or about the same as the long-term return of the stock market. The S&P 500 has returned 16% over the last decade, but market returns are volatile, whereas you are guaranteed not to lose any money from lending.
This is just an overview of stablecoins. There are also “synthetic” (non-collateralized) stablecoins earning 20-30% APY, and other ways to boost your lending income. Higher returns come with higher risks, so it’s important to understand the tradeoffs involved. Look for a detailed explainer in future emails.
Gold has functioned as a store of wealth for all of human history. The market cap of investment gold is about 10 times that of Bitcoin. Yet the total 10-year return of gold is just 12%. The total 10-year return for the S&P 500 is 266.3% and 278,476% for Bitcoin.
Unlike Bitcoin, gold is guaranteed to always be valuable because it has substantial non-monetary uses. So why is gold seeing such low returns during an inflationary period?
I’m not a gold expert. But here is my theory:
The crypto asset market cap exploded to $2.4 trillion in 2021. Money from investors worried about inflation is going into crypto instead. Gold prices reflect future expectations, not only current demand. I think smart investors expect wealth to flow into two assets: USD stablecoins and Bitcoin.
While the dollar is seeing inflation numbers not seen in 40 years, so are most of the other world’s currencies. If most people had to pick one asset to store their wealth, it would be the dollar, not their local currency, gold, or Bitcoin. Stablecoins are the future of the dollar because they allow the entire world to bypass currency controls that prevent them from converting their savings to dollars.
Gold is flatlining because investors are betting that stablecoins and Bitcoin will be the world’s reserve assets over the next ten years. As Bitcoin builds a longer track record and captures more and more of gold’s market cap
, supporting gold rather than Bitcoin will start to seem like an extreme position.