From Hyperinflation to Crypto: The Search for Wealth Preservation in an Era of Asset Bubbles & Crippling Economies

Ruben Merre
Coinmonks

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Several countries in the world are tormented by hyperinflation and/or a spiking unemployment rate. Populations have no choice but to let go of their country’s national currency and are searching for other ways, platforms, assets that can aid in preserving their wealth. This article considers three possible asset classes as potential safe havens: gold, equity markets, and crypto. Although gold is typically a good hedge against inflation, its investment performance over the last decade is modest, to say the least. Stock market indices in their turn are at all-time highs while the underlying economies face several negative forces in the battle against COVID-19. When it comes to cryptocurrencies and the crypto world, the majority of people in society have an unfavorable impression: it’s insecure, unstable, and can’t be trusted. Negative news about price crashes, financial loss, hacker and criminal involvement are more the norm than the exception, coloring crypto’s reputation all shades of gray. Yet, inhabitants of countries with high inflation rates seem to be flocking to this relatively new asset class in search of wealth preservation. This article outlines some of the issues said countries and their people are facing, potential safe haven assets, the rationale behind cryptocurrency-based solutions, and important reflections to make when considering a crypto wallet.

The Bloomberg Misery Index — When hyperinflation and unemployment rates soar

In 2014, Venezuela’s inflation rate hit 69%, the highest in the world. The following years, the country kept on shattering records, with hyperinflation soaring year after year, reaching an astounding 1,700,000% in 2018. At that point, the Venezuelan government decided to stop publishing official inflation rates. This triggered Bloomberg to make its own estimates by introducing the “Cafe Con Leche Index”, which tracks just one thing: the price of a cup of coffee in Venezuela. Albeit not nearly as sophisticated as a conventional consumer price index, Bloomberg argued it “has merits too: it’s tangible; tracked regularly; and, given that it monitors a product consumed by Venezuelans everyday, provides a unique up-close look at inflation in the country.”

“In 2014, Venezuela’s inflation rate hit 69%, the highest in the world. The following years, the country kept on shattering records, with hyperinflation soaring year after year, reaching an astounding 1,700,000% in 2018.”

— Central Bank of Venezuela

Then there is the Bloomberg Misery Index — a later version of Arthur Okun’s misery index — which scores countries based on how “miserable” their economy is, measured by the unemployment and inflation rate. Venezuela, Argentina, South Africa, Turkey, and Colombia have been leading the index for a few years now. And yes, Venezuela has been the uncontested number one for the last 6 years!

The Bloomberg Misery Index 2020 featuring the top 5 most and least miserable economies out of 60 countries. Source: Bloomberg.
The value of one U.S. dollar in Venezuelan bolívares fuertes (before 20 August 2018) and bolívares soberanos on the parallel (or black) market through time. Vertical lines represent every time the currency has lost 90% of its value, which has happened eight times since 2012. The graph shows that as of March 2020, the currency is worth 750 million times less than it was worth in August 2012. Since the beginning of the presidential crisis in Venezuela in January 2019, the curve has been less steep than previously, meaning that the rate at which the value is lost, inflation, has slowed down. Source: Wikipedia.

In a similar pattern as Venezuela, the Argentine peso has lost 90% of its value compared to the US Dollar in just the past five years. Confidence in the Turkish lira is also on a downward trajectory as the inflation rate in 2020 alone hit 12% versus interest rates on savings accounts dropping from 8.5% to 8.25%. The COVID-19 pandemic is only aggravating things for these economies, causing national lockdowns, travel restrictions, widespread unemployment, lower demand for consumer goods, and minimal business activity. As economic conditions remain harsh and fiat currencies in these countries continue to lose value, citizens need to and are turning to other forms of investments and trading to protect the intrinsic worth of their assets.

The inflation rate of the Argentine Peso reached over 20% in the last 12 months alone (September 2020 data); Source: XE.com

Finally, G8 countries aren’t spared from moving up or down the Misery ladder either, with the US jumping 25 spots up to position number 25, amidst the increased unemployment rate in the US under the Trump Administration.

History repeats itself. During the Weimar hyperinflation event of the early 1920s, wheelbarrows replaced wallets….

The search for safe haven assets

A safe haven asset is defined as “an investment that is expected to retain or increase in value during times of market turbulence”. When considering store of value, which refers to long-term wealth storage, gold has historically been the first to come to mind. However, although gold tends to protect against inflation, gold’s performance has been very fickle in the last decade when it comes to its real investment returns. If one bought gold in 2012 for example, they would have had to wait until mid-2020 before actually earning a — modest — positive return over an 8-year time frame. Only when looking at the “real” long term, i.e. beyond the last decade, does it become clear that gold has been on an upward trend since at least the early 70s.

Price performance of gold over the period 1973–2020. Source: Goldprice.org
Zoom in on price-performance of gold over the period 2011–2020. Gold has only just come out of its bear market since mid 2020. Source: Goldprice.org

In another asset class, the stock market remains on fire and is posting the longest historic bull market we’ve ever seen, reaching record highs at a constant pace over the last few years. Data suggests there is a significant correlation between equity markets moving up and the size of stimulus spending programs. The US is a good example, on pace to inject $6T of new stimulus spending into its economy in 2020 alone, more than all previous rounds of quantitative easing (QE) combined. While such stimulus programs may push stock prices upward, the real link to the underlying economy has become increasingly vague. Unemployment rates are reaching new highs of their own and economies are showing progressive signs of slowdown to even crippling, especially in the current COVID-19 context. The risk/reward trade-off of investing in the stock market right now is — to say the least — debatable.

This graph shows how stock market prices rise when the Fed goes into Quantitative Easing (QE) mode, and how they fall when the program stops or is reversed (Quantitative Tapering /QT). Source: Real Investment Advice.
Nasdaq 100 performance since the 2008 market crash looks similar as typical asset bubbles, continuously posting new all time highs since 2011 (performance shown is from a QQQ ETF, which tracks the movements of the Nasdaq100). Source: Tradingview chart analysis.

Do cryptocurrencies show potential as a safe haven?

So what about crypto? Well, cryptocurrencies seem to be coming right out of a prolonged bear market that started in early 2018. Bitcoin reached a 15-month low of around $3,300 in December 2018 and is currently in recovery mode. But it’s heading right into bullish territory with its price floating around and above $10K in recent weeks — although still about 50% under its previous all-time high at $19,783.06 (in December 2017). The relatively small size of the crypto market ($340 billion at the time of writing) compared to other asset classes has triggered populations of top “misery” countries to actively reflect on the potential safe-haven nature of bitcoin and other players in the crypto space. Bitcoin is of specific interest as it is proclaimed by many to be a real store of value. If anything, this already drives a self-fulfilling prophecy if sufficient investors believe this. However, the most intriguing factor, especially to those tormented by hyperinflation, is the very opposite nature of bitcoin: it’s in fact a deflationary asset. Only 21 million bitcoins can ever be mined, a strong contrast to all those central banks that keep printing money. With over 45 million millionaires in the world, less than half of them can own one full bitcoin or more. Many cryptocurrencies have a similar deflationary nature.

Bitcoin is a deflationary asset. Total number of minted bitcoins and projected bitcoin inflation rate. Source: github.

Since they aren’t run by governments, cryptocurrencies remain solid even if one country is suffering economic problems and instability. Whereas not being government-backed used to be one of the reasons to avoid them, it’s now one of the very reasons for their gaining popularity. Neither governments nor individuals can devalue cryptocurrencies since they can’t create more of them. Furthermore, the value of cryptocurrencies increases and stabilizes as more people use them. Domestic or international transactions and trading with cryptocurrencies are also quicker and cheaper than with traditional currencies. Payments can be made to anyone around the world in seconds rather than hours or days and at little cost. Transactions are also encrypted, with personal details and passwords only visible to the owner. Considering these and other benefits, trust in cryptocurrencies is on the rise as they help people regain control over their finances, provide an environment of security for assets and protection against inflation.

In particular, people living in countries facing hyperinflation have developed an earlier and higher appetite for switching to cryptocurrencies as a potential stable asset and store of value. Blockchain analysis company Chainalysis, points out in its research that “Venezuela represents an excellent example of what drives cryptocurrency adoption in developing countries and how citizens use it to mitigate economic instability. Our data shows that Venezuelans use cryptocurrency more when the country’s native fiat currency is losing value to inflation, suggesting that Venezuelans turn to cryptocurrency to preserve savings they may otherwise lose.” and “We also see this pattern in other Latin American countries, as well as Africa, East Asia, and elsewhere.” Chainalysis’ 2020 Global Crypto Adoption Index positions Venezuela, South Africa, and Colombia in the top 10, Argentina at 28 and Turkey at 29.

“Venezuela represents an excellent example of what drives cryptocurrency adoption in developing countries and how citizens use it to mitigate economic instability. Our data shows that Venezuelans use cryptocurrency more when the country’s native fiat currency is losing value to inflation, suggesting that Venezuelans turn to cryptocurrency to preserve savings they may otherwise lose.”

Source — Chainalysis (“The 2020 Global Crypto Adoption Index: Cryptocurrency is a Global Phenomenon”)

Stablecoins as a store of value

Stablecoins are defined as “cryptocurrencies that peg their market value to an external reference to offer price stability”. In comparison to bitcoin and the vast majority of altcoins, stablecoins are less volatile because their price is pegged to a reserve asset. They provide the instant processing, security and privacy of crypto payments, while also offering a similar investment rationale of buying the actual physical underlying asset. This eliminates fears and doubts over value volatility that those unfamiliar with the world of crypto may have. A good example of a pioneer who has successfully matched a stablecoin to physical gold is VeraOne (ticker VRO).

VeraOne is an ERC20 token based exclusively on gold stored in highly secure zones, regularly audited by trusted third parties, with a full (100%) counterpart. As a result, the price of 1 VRO is equal to one gram of physical gold (XAUEURG) and is also effectively backed by it. The actual secure physical storage is made possible by France-based AuCOFFRE.com, a platform on which private citizens can sell and purchase precious metals since 2009. The tokenized version of gold (in the form of VRO) is a result of combining AuCOFFRE.com’s decade of market knowledge in the precious metals sector with formal agreements signed with Gibraltar’s Ministry for Economic Development to issue coins that are internationally recognized legal tender, and VeraOne’s set-up as a subsidiary of the platform that takes care of aspects related to blockchain. VeraOne’s primary aim is to offer a stablecoin that people can trust. It provides a robust, reliable alternative to existing options that rely heavily on tangible assets or classic currencies like the dollar. Existing stablecoins backed by the dollar can be dangerous as the collateral is not 100% guaranteed.

VeraOne has developed an exchange currency that protects against excessive fluctuations in value and can serve anyone around the world, including underbanked areas. For people in countries experiencing dire economic circumstances and hyperinflation, stablecoins like VeraOne are a worthy option for investment and asset protection. However, it’s important to note that while the actual gold is stored in a safe physical vault, VRO tokens are kept on the blockchain. To ensure maximum security of the tokens, VeraOne partnered up with NGRAVE, a digital asset security provider boasting the most secure digital asset and crypto wallet in the world.

Central Bank Digital Currencies (CBDC)

Alongside increased interest in and adoption of cryptocurrencies on personal levels, government exploration and research into central bank digital currencies (CBDC) are also escalating. CBDC is a new form of digital currency to replace fiat cash. Built on the similar technology of existing private payment providers and cryptocurrencies, CBDCs have the potential to enhance payment efficiency, expand financial inclusion, expedite settlement flows, and reduce end-user costs.

In comparison to private payment providers, CBDCs could offer more consumer protection, inclusion, and security. Opportunities, challenges and other questions associated with privacy, legal and regulatory safeguards, financial stability, and payment ecosystems are still in the exploration phase. For CBDCs to be a competent tool, a well-thought-out comprehensive digital infrastructure, effective governance, and knowledge of financial technology need to be in place. Decisions on how to design CBDCs within domestic legal frameworks and understanding of potential or associated risks still need time to be developed and assessed. As such, CBDCs are not an immediate solution for citizens seeking stability and security for their assets in current times of economic crisis and hyperinflation.

But is holding crypto safe?

Although the benefits and potential of cryptocurrencies are experiencing increasingly wider acknowledgment amongst the masses and wallet ownership rates are on the rise, the world of crypto is not without its issues. Blockchain has one of the most advanced forms of innate security, with Bitcoin’s employed cryptography yet to be breached. The core of its security resides with so-called “private keys”, the access keys of a bitcoin- (and by extension a crypto-) wallet. On the one hand, bitcoin private key security is unbreakable with today’s existing computer power. A computer that doesn’t know the key would have to use a brute force attack, meaning it would have to try around 10⁸⁰ different possible values, which is practically impossible with computers available today. But if the challenge is moved from cracking private keys to finding and stealing them, everything suddenly becomes a lot easier for hackers. Cryptocurrencies are per definition digital, and digital solutions create keys online. Once there is even the slightest digital trace, hackers can use their full toolbox to easily find the private key rather than having to brute force it.

Growth in the number of unique blockchain portfolios is still growing parabolic in 2020. Source: blockchain.com.

As the public and private keys of hot (i.e. online) wallets are stored online, any holdings in hot wallets are more vulnerable to cyber attacks than cold (i.e. offline) wallets. Although cold wallets hold cryptocurrency tokens and private keys offline, hackers can still sometimes gain access to these storage tools. The most basic form of cold storage is a paper wallet, where public and private keys are written on a piece of paper. Although protected from hackers and online attacks, the drawback of this method is that a user will lose access to their funds if the document is stolen, lost or destroyed. A paper wallet also needs to obtain the private key elsewhere, and in most cases, the source will be an online key generator. “Hardware” wallets are another form of cold wallets. In essence, they’re devices that can generate private keys in an offline setting and sign transactions without exposing the private keys online. However, the majority of these solutions still need to be connected over USB, Bluetooth, NFC or similar technologies to e.g. sign transactions. They can therefore be considered more of a “semi-offline” category, where there are still remote attack vectors.

Another issue to consider is that not all wallets support all cryptocurrencies, so it’s not unusual for cryptocurrency owners to own multiple hot and cold wallets that are compatible with different cryptocurrencies. While the complexity of wallets and private key management is created to safely store and secure a user’s cryptocurrencies, it’s often this very complexity that causes mistakes and leaves cryptocurrency owners vulnerable. In the current context of increasing cryptocurrency ownership, properly securing and safeguarding private keys, i.e. the wallets, are of utmost importance. This is where NGRAVE’s ZERO, the most advanced and coldest hardware wallet in the digital asset space comes into play.

Securing your crypto the right way

To successfully secure a user’s crypto wallet, a strong key generation process should create keys that are statistically unique, random (i.e. unpredictable), and generated away from any prying eyes. After the keys are generated, a user needs to be able to consult their accounts in real-time and receive or sign transactions without ever exposing the private keys. In the event that a user loses access to their device, a clever way of recovering their wallet without any third party risk needs to be available. Therefore, NGRAVE has developed a secure and user-friendly end-to-end solution empowering the end user to manage their digital assets with full peace of mind. The solution exists through a 100% offline hardware wallet called ZERO, an encrypted backup solution called GRAPHENE, and a mobile app called LIQUID.

NGRAVE’s hardware wallet ZERO was developed in close collaboration with the world’s top tier in nanotechnology, chip manufacturing, applied industrial cryptography, and hardware security. It features a secure Operating System that has achieved — the only product in the market to achieve it — the Common Criteria EAL7 security certification (the highest attainable security certification in the world). ZERO is 100% offline from secret key generation to transaction signing. The only communication ZERO has with the outside world occurs through one-way QR codes that never contain any sensitive information. Users are effectively never exposed to any online attack vector as there is no reliance on any kind of network connection capability (WiFi/Bluetooth/NFC) nor a need for USB connection. Moreover, ZERO was designed from scratch to be tamper-proof against any sort of physical attack.

The NGRAVE ZERO hardware wallet is the most secure digital asset wallet in the world, and the only one to achieve the EAL7 security certification for its secure OS.

To create strong keys, ZERO possesses the most advanced wallet generation process in the world. Private keys are generated in real-time together with the end user so that no third parties — not even NGRAVE — will ever have access to or knowledge about the private keys. The key generation process incorporates part of the user’s biometrics, as well as other special features, to make the key even stronger. ZERO was co-created and built with groups of end users to make it seamless to use, boasting a 4-inch, high-quality touchscreen with simple user interaction flows. Coins are effectively just one tap away.

NGRAVE is currently the only player to provide an end-to-end solution that considers and radically improves every single step of the user journey. Besides offering “TheColdestWallet”, we’ve also designed the coldest key back-up and recovery: NGRAVE GRAPHENE. GRAPHENE is a cryptographic puzzle made out of two fire-, water-, corrosion-, and shock-proof everlasting stainless steel plates. It eliminates the need for the industry’s traditional practice of writing down private keys on a piece of paper. The product incorporates a smart encryption method, making a puzzle of the two-plate set-up. It is also the only solution in the market that is recoverable in case of loss.

NGRAVE LIQUID is a mobile app that provides users with a real-time overview of their portfolio and the possibility to receive or initiate and sign transactions without ever exposing private keys. Communication between ZERO and LIQUID takes place exclusively through a secure one-way QR code communication. For example, users simply share their QR code if they want to receive a transaction. The QR codes contain limited and non-sensitive information only so that private keys are kept offline at all times and hackers won’t stand a chance of accessing a user’s information.

NGRAVE’s product suite was created to empower users to truly own what is theirs, i.e. they should be the true owners of their digital assets and also the ones who decide if a third party should ever have access to a private key or not. In the journey to support all tokens, NGRAVE has recently joined forces with VeraOne so that users can protect, manage, and HODL their gold-backed stablecoin VRO in the most secure, yet seamless-to-use way possible. The partnership aims to encourage and enable users to invest in the digital currency backed by physical gold, saving them from the hassle of buying and protecting an illiquid asset such as physical gold.

”NGRAVE’s product suite was created to empower users to truly own what is theirs, i.e. they should be the true owners of their digital assets and also the ones who decide if a third party should ever have access to a private key or not.” — Xavier Hendrickx, CTO NGRAVE

Conclusion

This article outlines some of the issues high inflation rate countries and their people are facing, and why this is driving their search for a store of value other than the national currencies they use for daily transactions.

Gold is a potential safe haven because of its anti-inflationary characteristics, but its investment performance over the last decade has been very modest. Equity markets are being artificially inflated by ever newer and bigger stimulus spending programs, with the US’ latest program injecting $6T into its economy — more than all previous stimulus rounds combined. Arguably, this results in some investors reallocating to gold as a potential hedge. But for most, especially countries with hyperinflation, the risk/reward ratio of investing in cryptocurrencies — most of which are still trading at a 50% discount to their all-time high — seems like a valid reason to at least consider crypto as an option. The article further investigates the assumption of crypto as a candidate for wealth preservation and compares different categories, including bitcoin, stablecoins, and CBDCs. Finally, for those who decide to invest in the crypto space, important considerations such as the choice of a good security solution are discussed.

About the author: Ruben Merre is a repeat tech entrepreneur, polyglot, life-long learner and founder and CEO of NGRAVE, the digital asset security company behind “ZERO”, the most secure cryptocurrency wallet in the world. Since 2018, Ruben and his team have partnered up with the top tier in nanotechnology, cryptography and hardware security, as well as thought leaders such as Jean-Jacques Quisquater, famous cryptography professor and second reference of the bitcoin paper. The result: a true end-to-end solution for managing digital assets, at maximum security (EAL7, highest security certification in the world), and an intuitive user interaction.

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Ruben Merre
Coinmonks

Co-Founder & CEO NGRAVE | www.ngrave.io | Protecting Your Private Keys From A — Z. The Coldest Wallet.