Hedging Against Loss by Michael Waters

Covid-19 was devastating in more ways than we can currently imagine. It is likely that we will continue to see waves of damage for years to come, with the current wave forcing us into a recession worse than 2008. This is evident when we look at our fiat currencies, such as the US Dollar.

While inflation has been rampant since the 70s, 2021 is the year that fiat effectively becomes a black hole. The cost of basic goods in the US alone has risen astronomically. Materials needed for processes like commercial and residential construction are no longer attainable for many smaller businesses. The price of lumber has risen over 236% and steel in up a whopping 300%. This makes building something like a single-family residence incredibly expensive for contractors who must then stop the hemorrhage by billing their customers an additional 20–40%. As a result, real estate is at an all-time price high, while the US Dollar continues to bleed to death.

In a previous article we discussed the drawbacks of returning to the gold standard — the supply is too finite and it suffers from wild swings in valuation. Other monetary solutions may be better in the short term but also suffer severe fallibilities. We as individuals are guaranteed to suffer the brunt of our failing financial systems.

One of the least problematic options we can employ ourselves is to hold profit from crypto investments in a US Dollar-backed stable coin like USDC. This will keep profits at a consistent amount and will hedge against loss, but still fails to counteract the backing currency’s drops in value resulting from inflation. This also prevents us from seeing any growth in our investment. The ideal stable coin to employ this tactic with, then, would be one that is not only stable and decentralized, but that also hedges against inflation and allows investment growth over time.

Such a coin would ideally be backed by equity-secured real estate. Real estate is one of the only global asset classes to show a consistent increase in value over time and is widely recognized as an effective hedge against inflation. It consistently and reliably outperforms other assets, all while maintaining a lower risk factor than other investments. There are also multiple ways to protect an investment in real estate from the type of short-term market corrections we will see later this year. Preventive measures such as GAP policies or mortgage insurance are extremely effective at preventing a piece of property from selling at an amount below the initial value at the time of mortgage inception.

These measures, combined with the strength of a decentralized blockchain, make real estate investments virtually incorruptible in nature. This means that a cryptocurrency with a True Hedge against volatility and inflation would need to be pegged $1 for $1 against real property in a way that would make it superior to mortgages, liens, and other claims on the title, subject only to normal real estate taxes and maintenance. Such a coin has not yet been discovered, but would certainly have the power to increase in value and hedge against inflation at the same time.

On a broader scale, should a coin that employs these tactics successfully break into the crypto space, one would expect to see a wide-spread adoption of it as a useable currency, as exchanging any profits into fiat subjects crypto holders to burdensome Capital Gains taxes and is generally acknowledged to be an unattractive option. If a true stable coin existed without the volatility or shortcomings of traditional crypto, it would make sense to use it like one would use fiat currency and eliminate the need for fiat conversion.

Many businesses are already taking the initiative to accept cryptocurrency as valid payment for services and goods. This is the first step in creating a world in which we can walk away from defunct money systems and broken market operations. The next step is to search as hard as we can for the projects that can truly revolutionize both the crypto space and our real-world markets.

Only then can we recognize a world of equal monetary opportunity.