Beyond Bitcoin: Certain digital currencies are increasingly viewed as viable “store of value” assets, providing investors with a potential hedge against the eroding effects of inflation, suggests a Saxo Bank strategist.
Stanislav Kostyukhin, a trading expert at the Danish investment firm, shared in a recent interview that, “Cryptocurrencies are demonstrating characteristics of a safe haven asset. Their performance is largely independent of traditional markets, global economic forces, and especially inflation trends.”
As US inflation reaches a peak not seen in 13 years (currently at 5.4%), Bitcoin’s weak correlation with inflation has encouraged capital inflow into the leading cryptocurrency. Some commentators are now using the label “digital gold” to describe Bitcoin’s potential role as a future stabilizer of purchasing power, with analysts at JPMorgan Chase pointing to inflation concerns as a primary driver of Bitcoin’s recent price gains.
Kostyukhin mentioned that Saxo is observing inflation-driven investments, noting their cryptocurrency FX trading program has handled approximately $2.5 billion in trading volume year-to-date. He also pointed out that client interest extends beyond Bitcoin, with many retail investors diversifying into alternative cryptocurrencies (altcoins) for added inflation protection.
“Cryptocurrencies are rapidly becoming a crucial asset category for our clientele,” he stated. “As the digital currency industry continues to mature, we foresee increased interest and are preparing to broaden our service offerings to meet the changing demands of the market.”
Saxo Bank
Top 4 Altcoins as Inflation Hedges
According to Kostyukhin, Bitcoin remains the leading option for those seeking a cryptocurrency-based inflation hedge. He attributes this to its demonstrated minimal association with macroeconomic elements like economic growth or inflation.
“Since the beginning of 2020, Bitcoin’s correlation with the S&P 500 and Nasdaq is only approximately 20%,” he observed. “A large segment of investors, perhaps less familiar with the complex technical facets of blockchain technology, are simply seeking exposure to cryptocurrency due to its perceived long-term potential and tend to initially favor Bitcoin.”
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Despite its price volatility this year, Bitcoin has still shown gains, rewarding those with a long-term investment approach. It’s currently valued around $63,000, representing approximately 45% of the entire cryptocurrency market.
Kostyukhin also noted investor interest in Ether, the Ethereum network’s native coin, which captures roughly 20% of the market. He observed that Ether’s appeal extends to the mainstream, despite its involvement in complex technical applications such as NFT creation and smart contract validation.
“Ethereum’s correlation is slightly higher than Bitcoin’s, registering at around 30%,” he explained. “In a sense, it acts as a proxy for a variety of other second- and third-generation cryptocurrencies.”
Both Bitcoin and Ether possess built-in deflationary attributes, according to Kostyukhin. Bitcoin is designed with a total supply limit of 21 million coins. The Ethereum Foundation has implemented strategies for “burning” portions of Ether to reduce its overall supply.
“There is an argument against currency devaluation at play here,” Kostyukhin told Insider. “These protocols incorporate supply limitations that offer potential protection against inflationary pressures.”
He further added, “Quantitative easing has fueled worries over the devaluation of standard currencies,” referencing monetary stimulus efforts initiated by developed economies to assist economic recovery after the pandemic.
While general investors often focus on Bitcoin and Ether for their cryptocurrency portfolios, Kostyukhin suggests that experienced crypto enthusiasts are increasingly considering alternative coins such as Cardano, Polkadot, and Solana as inflation hedges.
“There is burgeoning interest in these later-generation tokens, especially Cardano, Solana, and Polkadot,” he stated. “The more technologically adept crypto investors tend to investigate the underlying technical characteristics of these currencies, focusing on aspects like scalability.”
“Some investors are being drawn to more scalable, effective protocols that have a lessened ecological footprint,” Kostyukhin concluded.
Lessons from the Dot-Com Boom and Bust
Many crypto market observers have pointed to parallels between the current digital currency climate and the Internet boom of the late 1990s. This has spurred worries about a potential market correction akin to the early 2000s, when the NASDAQ experienced a drastic plunge of roughly 80%.
Kostyukhin highlighted two main lessons cryptocurrency investors can derive from the dot-com era.
First, he pointed out the fluid and volatile nature of the crypto market, where the valuation of individual altcoins can dramatically fluctuate in short periods.
“If you examine the top 10 cryptocurrencies by market capitalization, the composition is remarkably dynamic. Predicting where the rankings will stand in two or three years is a considerable challenge,” said Kostyukhin.
Kostyukhin shared that Saxo Bank encourages clients to develop well-balanced and diversified portfolios, rather than committing substantial capital to singular altcoins.
“The situation mirrors the dot-com boom of the early 2000s, when it was challenging to determine future winners and losers,” he stated. “This is a significant reason why we typically advocate for diversification in cryptocurrency investments.”
Secondly, Kostyukhin urged caution regarding investments in so-called meme coins, such as Dogecoin or Shiba Inu. While both have seen significant gains this year, he likened them to overvalued websites from the early 2000s that temporarily benefited from broader interest surrounding the dot-com revolution.
“When considering investments in tokens outside of the top 10, or in less established cryptocurrencies, investors should exercise heightened scrutiny, research, and due diligence,” he emphasized. “We generally advise caution when it comes to smaller and less established tokens, drawing from the lessons of the dot-com bubble. Despite a proliferation of companies entering the market, many lacked the fundamental strength needed to sustain their high valuations.”