Inflation is Coming
But Tokenization Can Help Save Your Assets
As we all slowly come out of our Covid induced hibernation and start to spend more time out and about, you might have noticed that things seem more expensive than they used to. It’s not just in your head. While there are other reasons for the overall increase in prices, largely stemming from supply chain disruptions due to the past year of pandemic, a large cause is a sudden spike in inflation. In the US alone, inflation over the last 12 months leading up to May 2021 rose over 5%, the largest yearly increase since the 2008 financial crisis. Meanwhile, large economies in the south like Argentina and Brazil are both experiencing their highest inflation levels in years while still struggling with the pandemic and vaccine rollout.
Inflation has been a recurring phenomenon since paper money was invented, and it became even more devastating after the abolition of any asset backing in the last century. You might think that hyperinflation, and the dramatic scenes you probably think of when you hear the word inflation, only really happens in a country or time-period “far, far away.” But inflation actually happens quite regularly in every economy, even if it’s only a few percentage points per decade. However, every few decades, hyperinflation can also happen. For many economists, it’s not a question of if, but when. These hyperinflation cycles are actually so long, and sometimes artificially extended by cleverly replacing a currency early enough before the old one can become worthless, that most people rarely live long enough to truly experience it or, unfortunately, to learn how to handle it.
Now, we hear that a huge post-pandemic wave of inflation could sweep western economies. This is partly due to supply side pressure from COVID-19, partly due to longer term strains, and partly from a general lack of true competitiveness in our globalized, interconnected economies. Whatever the reason, the fact is that unusually high inflation in one form or another is coming, which means that having cash will become much less attractive than it has been in the past.
(Recent) Historical Hyperinflation
When you think of inflation, you probably conjure up the iconic images from Weimar Germany in the early 1920’s. The hyperinflation got so bad that literal cartloads of cash bought only a loaf of bread, and people resorted to using their worthless paper marks as wallpaper or kindling. Just a few years ago, Zimbabwe made headlines around the world for similar images during their hyperinflation crisis.
It’s very important to distinguish between normal inflation and hyperinflation. The US Federal Reserve states that an acceptable inflation rate is 2% or less. In 2008, Zimbabwe’s inflation rate broke 231,000,000%. That’s a massive difference, and helps explain why the Zimbabwean government was forced to print bills with face values of over 1 Trillion.
Inflation in 2021
Today, an inflation spike (not necessarily hyperinflation, but an abnormal increase like we are already starting to see) will probably look quite different than it did even a decade ago. This is due to the overwhelming rise of digital banking and cryptocurrencies, as well as the renewed interest in barter and community economies that has emerged with gig working and the extraordinary circumstances of a global pandemic. It’s hard to imagine your neighbors today carting around wheelbarrows of francs, euros, or dollars, but even smaller inflation spikes will (and are currently) be felt through higher consumer prices.
Some things will probably stay the same, though. As always, you’ll see savings, the contents of bank accounts, start to melt away. In a crisis situation, the absence of electronic or paper funds has always resulted in a tendency to stash as many “hard values” as one can get. Gold is a no-brainer hard value, as it’s been a staple of human wealth for millennia. While it will always be reliably valuable, it will also always be difficult to obtain it in quantity. And then of course there is the problem of transport and storage. These problems are compounded with less value dense assets than gold, like silver, copper, or even steel or wood. In the economic downturn that naturally accompanies serious inflation, industrial materials might lose their value, too, thought still not as much as the currency will lose.
In an economic downturn, owning any asset that has a utility value such as industrial metals and plastics, or necessities like water, fuel, and foodstuffs is always better than owning none. And, like any good investment portfolio, having a variety of these is better than just a single one. However, it quickly becomes problematic when one thinks of how to store these things and how to actually transact with them. It’s a tale as old as time, and the whole reason paper money was invented in the first place: practical liquidity.
‘Real’ Values Are A Hedge Against Inflation
Tokenization can actually solve this problem. If an asset-backed token is a cryptographically secure claim to the real good (a so called IOU — “I owe you”), then it can be used as “money,” a medium of exchange. Just as blockchain solved the double-spending problem, passing on the token is the same as passing on a piece of industrial metal. The metal stays where it is, but the claim changes ownership. To make this possible, the real assets being tokenized must actually exist and be stored safely in a way that protects their physical state. This could mean, for example, a secure temperature controlled warehouse. If you have the capacity to run such a warehouse yourself for all your assets, then you’re probably much better off than the vast majority of people on the planet. But while the average person can’t manage that sort of storage solution by themselves, in a crisis situation they can certainly join forces and work together to store and protect their assets. These real, hard-value assets are then digitalized (tokenized) by their owners, et voila — an asset-backed token.
Let’s say you follow this example and tokenize some steel. The token is backed by the real steel itself, which is stored in the warehouse. If the national currency is devalued thanks to inflation, the price of steel in that currency will automatically go up. But holding tokens means preserving the value of the fiat currency’s purchasing power at the moment it was used to purchase the tokens. And that’s actually the trick. The tokens are naturally much more liquid than the real asset. When you want to purchase something, they are either useful for bartering, or can be sold for the requisite amount of fiat money whenever you need it. Apart from some conversion and storage costs, you will have largely maintained the value of the fiat at the time you bought the tokens, even if the currency itself has devalued over time. Of course this makes even more sense when there is an active market where tokens of different assets can be swapped against each other, but that kind of economy will naturally follow an increase in the popularity of tokenizing real assets.
Asset-Backed Tokens: A New Concept of Value and Ownership
Just as the uncertainty of 2020 and the impact of the pandemic on the world’s institutions generated mass interest in DeFi, it makes sense that 2021 will be the year for renewed interest in asset-backed tokens. The current combination of negative interest rates and the projected spike of inflation means that hoarding cash or fiat is a recipe for losing money. Most cryptocurrencies like Bitcoin are still too volatile, and not universally accepted as a means of payment, to be a viable alternative. Even fiat-pegged “stablecoins” are only as stable as their fiat counterpart which, at the moment, ironically means they’re unstable and pretty much useless in an inflation scenario.
Because of this, it makes sense that more people will be looking, as they historically have done, to “real values.” That’s where asset-backed tokens, the digitization of real, physical values, come in, offering both stability and liquidity. The tokenization of less volatile physical assets is becoming an increasingly viable solution for those looking to hedge against market volatility and inflation, while opening the doors to a digital barter economy where these tokenized physical assets can be traded, stored, or sold on secondary marketplaces. There’s still some work to be done to develop the secondary marketplace ecosystem, but technologically speaking everything is ready to go.
The best part is that this solution has something for everyone. It’s desirable for high net-worth individuals who’s bank accounts are hurting from negative interest rates, or who want more liquidity from traditionally illiquid assets like fine-art or real estate. But it’s also perfect for emerging markets where devalued currencies make daily transactions difficult, and foreign investors wary. Agribusinesses, for example, can tokenize their constantly-needed products and offer these tokens for sale to foreign investors, or trade them locally for other necessary commodities like diesel or fertilizer. By combining inherently stable goods with blockchain technology, asset-backed tokens can become the true stable-coins, offering a level of security and liquidity that everyone can benefit from both right now, and in any coming inflation cycle.
At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real world applications, not just what’s technically possible.
CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token, to enterprise- grade token economy solutions, we have all the tools you need to quickly and affordably integrate blockchain into your business.
Interested in our results-focused, real-world approach? Then visit our website for more information, or get in touch with us directly to discuss your project.
