As countries around the world are literally getting chokeslammed by Covid-19, their economies are slowly grinding to a halt. Disruptions in supply chains, the essential disappearance of tourism and travel, and billions of people able (and willing) to work being locked down at home are the cause. Indeed, it is not the virus itself but the government responses which have crippled economies worldwide. Fret not, because the government is here to help you by putting citizens in debt through excessive spending, printing money, and lowering the interest rate!
Why is this a problem? Well, the rate of inflation for currencies has already been about 2-3% per year ever since governments were “freed” from the gold standard (where printed money represented a portion of gold stored in a bank vault) and could do just about whatever they want with their monetary systems. If you’re not in the loop, this means that your money is losing value at a rate of 2-3% per year or in other words, things are gradually becoming “more expensive” by 2-3% per year.
Now with the coronavirus pandemic, governments are borrowing a lot of money creating debt, printing a lot of money causing inflation, and some are tampering with negative interest rates including the United States. This means that the value of your money and your savings is in jeopardy. We are here to provide you with a few solutions to this problem using a fairly new technology you might have heard of – cryptocurrency. First, let’s review a few concepts to make sure you understand what we’re going to be telling you about!
What are interest rates?
If you are over the age of 18 we really hope that you know what interest rates are. In case you don’t, here’s a quick explanation. Interest rates are the percentages you gain (or owe) on some amount of money. Whenever you borrow money from a bank through a loan or make purchases on your credit card, you are accumulating debt which will eventually have to be paid back, with interest. Interest rates can vary, and they can exceed 30% per year on unpaid credit card debt. For example, if you had a 100$ credit card (cute) and spent the entire balance of 100$, you would owe 130$ to the credit card company at the end of the year unless you pay off that balance within the grace period (usually 30 days). Scary!
When it comes to saving, many banks will give you a small interest rate on money you keep with them in a savings account. These amounts can range substantially but are generally between 1-3% per year. This means that if you were to leave 100$ in a savings account for a year, you would have 101-103$ at the end of the year. Lucky you! The bank is able to give these perks to its clients because the bank uses that stored money for their operations and investments. Most banks are pretty damn good at handling money when it comes to spending and investment.
While this does technically carry some risk, as you can imagine it’s pretty hard to take down a bank, especially big banks. What’s spooky is that if the bank you have your money in suddenly went belly up, the laws in place to protect your funds can be quite mediocre depending on where you live. After all, the money technically belongs to the bank when you give it to them.
What are negative interest rates?
You’ve probably been hearing a lot about negative interest rates in the news, especially if you live in the United States. The way it’s generally explained is that you will get paid by the bank to borrow money. While this is technically true, the amount of money you would need to have to make negative interest rates worth your while would probably have to be substantial. The likelihood that negative interest rates will go lower than -1% is extremely unlikely. Instead, the FED will likely keep negative rates as close to zero as possible (such as 0.025%).
While the news seems to be hyping up negative interest rates, the reality is that it will probably do more to hurt than help the average person. This is because the interest rates for savings will also be negative, meaning you will be losing money for holding it in the bank. Again, this will vary by bank and they will (hopefully) create some sort of tiered system to protect those who have smaller amounts of savings, while punishing those who have significantly more. The government knows this is the effect it will have and its what they want during a time of economic slowdown – they want people to spend, not save, and for companies to borrow money to keep production and innovation on the rise.
If you aren’t too happy with these effects, there are in fact ways to hedge your savings against negative interest rates using cryptocurrency. To understand how, it’s important to briefly review what cryptocurrencies are and how they work. This is especially necessary since those banks we just talked about aren’t too fond of this technology which seeks to uproot their chokehold on the monetary system.
A brief overview of cryptocurrency
Now, before we continue it is important to note that this is not financial or investment advice and you should always do your own research before putting your money anywhere. That being said, we want this article to be one of the resources to inform you about cryptocurrency and how you can use it to hedge your hard earned cash against negative interest rates and inflation. As such, it’s important to briefly overview what cryptocurrencies are and how (most of them) work. This has been a pretty tedious task until now, but we are here to give you the simplest explanation you’ve ever seen – so simple that it can fit into a single tweet (if you water it down a bit).
Look at any paper bill from almost any currency. You will notice it has a serial number. This serial number is used by banks and governments to keep track of that currency. Cryptocurrency is the serial number without the physical bill, and instead of the bank and government having a record of these serial numbers, the record is shared between users in the system.
That ladies and gentlemen, is cryptocurrency in a nutshell. It has some additional features as well, namely that you can’t modify the transaction history or balance of any account. Since computers are constantly referring to each others’ records of who has what, the only way you could pull this off would be to somehow hack more than 50% of the computers in the network and make the changes you want. At this point in time, there are millions of computers in the Bitcoin network alone. Good luck hacking them all simultaneously!
There are over 5500 cryptocurrencies in existence, all which follow more or less the same principle (don’t worry, we will go through the important ones later). The reason cryptocurrencies have a bad reputation is because they are associated with nefarious activity such as the sale of illicit substances online. It is popular among criminals because of its “anonymous” design.
Building off of the earlier example with the physical dollar bill, take a look at your debit or credit card. It has an account number on it, and your name. The bank (and in some cases the government too) has a record of which account number belongs to which name. In the world of cryptocurrency, you don’t have to give any personal information to get access to a cryptocurrency wallet. A crypto wallet is really just a regular bank account without the bank nor any personal information attached.
While cryptocurrency and Bitcoin in particular has been used by criminals for illicit activities, criminals are increasingly turning to other cryptocurrencies which do a better job of keeping them in the shadows such as Monero. Of everyone using Bitcoin, criminals are already a very small slice of that pie and it’s getting smaller by the day as they slowly move to using other cryptos. It is worth noting that you should check to see if your government has any laws against holding cryptocurrency before buying any. You can use this resource as a guide.
Okay, now that you know what cryptocurrency is we can take you through a few methods of using it to keep your funds safe from those greedy banks and their negative interest rates.
If you’re new to cryptocurrency or know next to nothing about it, you’ve probably only heard of Bitcoin and maybe Ethereum. Not all cryptocurrencies are the same, and there are in fact different categories of cryptocurrency which are both easier to understand and more familiar to the average person. Stablecoins are one of these. They are a fairly recent invention in the world of cryptocurrency and are definitely one of the coolest developments in recent years. To find out why they are so important and why they’ve recently entered the crosshairs of some governments and regulators, we have to go back a few years.
Pretend we’re back in the early days of Bitcoin. You just made a 6000+% profit. The market is really volatile and you have to pull out quickly to sell. What do you do? Well, you pray that you’re able to find a service provider or individual who will give you USD or EUR or another fiat currency in exchange for the Bitcoin you have at the current market price which is changing by the second. As you can imagine, this wasn’t easy to do. Cryptocurrency traders didn’t really have any way of keeping their funds stable within the volatile cryptocurrency market.
Enter stablecoins. These cryptocurrencies are backed by actual fiat currency, such as USD or EUR. They are quite literally digitized money. Believe it or not, some of the companies which issue these stablecoins are regulated and audited on a regular basis to ensure they actually have the money in the bank to back the amount of stablecoins they have issued. Perhaps the best example is USDC, a stablecoin created by Circle, the parent company of probably the best known cryptocurrency exchange in the United States, Coinbase.
Putting your money into a trustworthy stablecoin like USDC won’t give you any sort of interest like a savings account, but you will at least not be actively losing money. Buying stablecoins comes at a slight premium though (that’s how Circle and other issuers make their money), so make sure to do the math yourself to see if it’s a viable option for you to buy stablecoins to keep your savings from shrinking in a bank account with negative interest rates. You also won’t be subject to the volatility of the cryptocurrency market – you don’t have to go near Bitcoin or any of those other cryptos to keep your funds safe.
Tokenized precious metals
Ever thought about buying gold? If you’ve looked into it, you’ve probably been told about the two options you have. The first is to buy the actual physical gold. There are two issues with doing this. Firstly, you have to find somewhere safe to store it. Secondly, you have make sure you’re going to be able to resell that gold without any issues in the future. If you’ve bought your gold from some little shop at the end of the one of the main streets in your city, good luck convincing someone to give you the actual market price for your little yellow mystery nugget.
It’s generally a good idea to buy precious metals from reputable manufacturers, such as the Royal Canadian Mint. This will make reselling the asset much easier and in some cases you can even sell them back to the manufacturer for the market price! This is because they charge a small premium for every purchase, and they know that whatever gold they buy from you will probably get resold within a few months or years at the new market price, again with the extra markup. However, if you’ve checked the Royal Canadian Mint website during this pandemic, you’ll see all the ‘regular’ gold is sold out! Now what?
You can always buy an Exchange Traded Fund (ETF) for gold or some other precious metal. This removes the hassle of finding somewhere to store it, and reselling the ETF will be much easier than finding a buyer for your physical metal. This sounds great except for the fact that you don’t actually own the underlying gold. If the economy was really to get ugly, you’d be in deep doo doo. Believe it or not, there is a third option to buying precious metals using cryptocurrency which has recently emerged that combines the best of owning both the physical gold and the fluidity of reselling a gold ETF.
Like stablecoins, there are companies such as Paxos and Uphold which issue digital versions of these precious metals. Paxos in particular is transparent, regulated, and audited on a regular basis by the New York Department of Financial Services. Through Paxos, you’re able to buy what is essentially a digital certificate for a certain amount of gold, stored physically in a Brinks vault in London. You’re even able to enter in the code of the crypto you bought to see which bar your gold belongs to. If you actually bought enough to have a claim to an entire bar, you can request to have it shipped to an authorized dealer and pick it up in person!
While Paxos also charges a premium (like all gold sellers) they do not charge any storage fees. Better yet, the actual assets are stored in an insured trust called the Paxos Trust. This means that if Paxos as a company goes under, you will still have access to these assets. It’s quite a brilliant invention and every month there are other companies that are trying to do the same with other assets such as silver and palladium. Putting your money in digitized precious metals might just be the best way to protect your savings against both negative interest rates and inflation in the modern day.
Cryptocurrency lending programs
The last way you can protect your savings is through cryptocurrency lending programs. On many platforms such as Binance, you can keep assets like Bitcoin and USDT (another stablecoin) locked on their platform in exchange for interest ranging from 1-7% per year. They lend these assets out as loans to other people in the cryptocurrency space. Normally some level of KYC/AML regulations are required to ensure people don’t just take the crypto and run.
There are dozens of platforms which offer this service. Not all of them have the same reputation and trust as companies such as Binance, however. As such, it is extremely important to do your own research when it comes to these platforms. Still, at a time when banks are giving smaller and smaller returns on your money, even taking some of it, exploring alternatives such as these, although riskier, may prove to be much more lucrative at a time when cryptocurrency is starting to become mainstream.