How to Navigate Crypto Investing with Inflation and Fed Rate Increases

Authored by Matt Heater
Matt Heater

Matt Heater

Published March 22, 20224 mins

If you’ve noticed a steady (in some cases sudden) rise in the price of your everyday goods, you can probably guess why: inflation. It’s hard not to see or hear the word inflation daily given how much press it’s receiving. Recently, we learned that inflation was up 7.9% over the last year (the biggest increase in 40 years). In response, the Fed announced it would raise interest rates, for the first time in three years, by 0.25% to begin curbing inflation, with a high likelihood of additional increases this year. 

Back to the 80s?

The big question on many investors' minds right now is whether or not the Fed raising rates may eventually tip the economy into a recession, similar to what occurred in 1981. (Here’s a history lesson for Millennials and Gen Z, or ask your parents what it was like getting a 17% mortgage rate.)

A severe economic downturn would almost certainly lead to a pullback in risky assets, presumably driving down crypto prices. However, to be completely fair, we have nearly no historical precedent to analyze crypto prices in a recession driven by monetary policy and are learning from the market in real-time. Remember, Bitcoin was born in 2009 and the COVID-19 recession was a unique public health event rather than one driven by economic forces like inflation and interest rates. And not all cryptos can be compared apples-to-apples. Some have industry disruption use cases (e.g. DeFi, play-to-earn, etc) while others are alternative currencies and/or stores of value. So predicting the near-term price movements of crypto in a recessionary period is quite the guessing game—probably just as difficult as picking individual cryptos to invest in, regardless of the state of the economy. 

We are keeping our eyes on Bitcoin’s behavior. Historically, gold has served as a popular “safe haven” asset and useful inflation hedge. Many have argued that Bitcoin is somewhat of a digital version of gold that investors should embrace as a store of value. If the long-term returns on Bitcoin can continue to outpace inflation, the digital asset may live up to this claim. This thesis may soon be put to the ultimate test in 2022. 

How to navigate crypto investing in times like these?

Generally, we view the investment opportunity in crypto as one that will play out over a long-term horizon. Our world continues to accelerate into a distributed and digital economy and we expect blockchain to be a foundational piece of every industry. The opportunity to participate in this investment is one that all investors should consider. The key is to size your allocation appropriately for your personal portfolio and risk tolerance, diversify (avoid picking individual cryptos on an exchange), and adopt a long-term outlook. 

A particular strategy we like is Dollar-Cost-Averaging (or as the cool kids say “DCA”), which is simply allocating the same amount of money at fixed intervals over time into an investment. This in turn reduces the impact of near-term volatility and the short-term price movements by not trying to time the market. Picking the perfect entry and exit point is a game best left to the day traders (who mostly lose money). And the other alternative, not investing when prices are down, can lead to “buying high” when markets are optimistic, lowering your returns. We are here for a generational investment, to help you build wealth over time. 

For those of you that have joined Makara by Betterment, congratulations on embracing a new asset class and evolving your portfolio. For those still evaluating the opportunity, we encourage you to learn more about the industry through the Makara app. When you are ready, open an account, make a plan, start small, and enjoy the journey. 

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Authored By
Matt Heater

Matt Heater

Matt previously led business development at a boutique digital asset consulting firm and he held a variety of roles at IBM, including as a consultative sales lead within Watson Financial Services. He led operations for the Blackstone Group’s Hedge Fund unit’s London office, and evaluated mutual funds and hedge funds as an auditor at KPMG. Matt earned his MBA from the University of Washington, his Bachelor’s degree in Business-Accounting from UNLV, Lee Business School, and holds the Chartered Alternative Investment Analyst designation (CAIA) and a Series 65 license. Matt is a fan of Michael Mann films, and has a cat named Edie.