Looking to Hedge Inflation? Buy Bitcoin and THIS Crypto

We are living in a world of elevated and persistently high inflation. This time is different, and we are likely in a period of elevated inflation which is unlikely to go down to the Fed target of 2% any time soon. What’s different this time than previous periods of high inflation that were able to normalize to the 2% target? What is very different this time is the confluence of factors that have been caused by both supply as well as demand shocks to the global economy. A large portion of inflation is caused by elevated prices for commodities. As someone who has been through many commodity cycles in the past, I have never seen one like this where commodity prices are high due to the Russia-Ukraine war which has caused a massive shock to world commodity prices from natural gas, to wheat, to base metals; the list goes on and on. But this shock was only the final nail in the coffin. Commodity prices already started to rise even before the war started caused by the massive amounts of capital flowing into energy infrastructure projects to reduce global carbon emissions. This started to cause metals prices (copper, steel, aluminum, and other metals) to rise due to their high concentration of use by infrastructure projects from wind and solar farms to grid scale storage and EV’s. The targets for capital that will be needed to flow into decarbonization range from 1-4 Trillion a year through 2050. That’s trillion with a “T”. Much of that capital will flow into purchasing metals. The Russia-Ukraine war only gas lit that demand and made the problem that much more acute. But to make matters worse, at the same time, demand came roaring back post Covid for everything from air travel pulling on jet fuel and gasoline to food and at the same time exacerbated by supply chain issues that were caused by Covid itself. These two supply/demand shocks and the rewiring of the entire global energy system have caused an unprecedented shock to the global system and hence why they (at least in part) will likely cause inflation to remain elevated. Add the current and growing conflict in the Middle East, this can easily turn into an oil supply shock the likes of which hasn’t been seen since the oil shock of the 1970’s. While interest rate policies in the US and abroad have done some work to lower inflation, they won’t be enough this time to lower inflation to the Fed’s 2% target.

So, what does this all have to do with Chainlink you may ask? During periods of high inflation, real assets (such as real estate, art, wine, collectibles, and in general, infrastructure) tend to perform well as an inflation hedge for investors looking to protect the value of their capital. And even global investor capital is at risk due to monetary debasing which (in part) is used to fund infrastructure, defense, and fiscal spending in general, and other capital-intensive projects. It all must be funded. How does that happen? It’s either borrowed or printed or worse, “both”. Commodities are also currencies. Many of them though are necessary to make the world function. People need to eat, travel, and notably, reduce global carbon emissions so that there might be a world left for their future generations to continue to thrive.

An overlooked area of infrastructure that could also serve as an inflation hedge is technology infrastructure as well. Infrastructure is an asset class that is needed in “all” periods (inflationary and deflationary). At its core, tech infrastructure is no different than a home. Core tech infrastructure in the modern era that is already and is likely to be powered exclusively with Web 3.0 applications and companies will also be a public necessity and good, just like housing, food, and water. Companies that facilitate that core infrastructure can also serve as a hedge against inflation. And Chainlink is not only one such company but is likely going to be the leading hedge against inflation for many decades to come. While many tout Bitcoin as a true hedge against inflation (even better than Gold) and I am a firm believer in that not just as a narrative but as a simple reality given its superior technological qualities that make it a better store of value against fiat money printing (finite supply, ease of transferability, and even as a method of payment in times of absolute disaster), one may look at Chainlink as even a better store of value over the long term (or at least as good as one as Bitcoin). While it is true that Chainlink’s total supply at $1 B tokens is much larger than Bitcoin’s of 21 MM, it is still a fixed supply. Furthermore, that supply, while seemingly large, is proportionally sized to the use case of $LINK’s native token and the utility that it performs given the size of the actual use for it, which is to secure the entire global value transfer system which will ultimately all be tokenized. The size of the potential tokenization market is 16 trillion according to various research reports. That number could be highly understated. Tokenization in a Web 3.0 world can not exist without that value being cryptographically secured and facilitated via seamless transactions connecting disparate blockchains across the world and transferred without the use of off-chain data. This is where Chainlink comes as it performs all those essential, core, middle-ware services that power and will continue to power a financial future that is decentralized. The way that network is secured is via Chainlink node operators that validate off-chain data, off-chain and on-chain compute, and other services that are necessary to facilitate the network to work and perform its necessary functions. This is done through staking and Chainlink’s crypto-economic model. Node validators of course need to be paid (not just for their time and services) but most importantly, for the compute, (hardware, memory, bandwidth, electricity, etc.) which is essentially hardware infrastructure. There it is again, the “key” word being infrastructure. Hence, while Chainlink is a technology software Web 3.0 company, because of its distribute network and need for node validation which only operates through staking (where node operators are paid in Chainlink’s native token $LINK to perform and pay for that hardware and services), it really all goes back to infrastructure. Furthermore, staking removes $LINK tokens from circulating supply and therefore acts like a de-facto deflationary economic model without the need for that deflationary mechanism (unlike in many other blockchain protocols) to even be built into the code. The shear magnitude that will be required to secure the network powered by Chainlink as the need for that security grows all driven by the financialization of global value transfer is what will cause massive deflation in the reduction of circulating supply of $LINK tokens. That is “true” supply/demand at work, not a predefined programmatic artifact built into the protocol because it’s unnecessary. That is the “purest” form of real-world demand causing the value of the native token to rise because of the finite supply of LINK tokens. So, while $1 B LINK tokens might seem large relative to other blockchain protocols that too have fixed and even larger supplies than Chainlink does, the correct metric to look at is the total supply as a fraction of the demand for that native token. When looked at this way, given the $16 trillion in asset value (and likely much, much larger) that will be tokenized in the future and transact at orders more than that every day and will need to be secured, the $1 B is tiny when you normalize it.

So Chainlink can easily be dismissed or at best looked at as just “another” blockchain protocol on equal footing with others with as equal of a chance of success, when looked at through the lens of core infrastructure that is needed to power the future of Web 3.0, its “natural” deflationary model driven by “real” demand, and its fixed supply as a fraction of actual demand that it will serve, one can conclude that Chainlink is a true hedge against inflation and no different than a home, a wind farm, or an EV. In fact, it is “exactly” the same and can be used as a diversifier asset class that investors can use in their portfolios who are looking at hedging inflation and protecting the value of their capital (most of which is fiat that has no capped supply at all and never will). For investors, when analyzing any asset class, it is important to factor in a variety of factors (both fundamental as well as technical) when evaluating it. One such factor is market sentiment. In the crypto asset class, sentiment is the dominant factor that can drive price.

At Market Prophit, we track sentiment in social channels that is being expressed about cryptos. We analyze real-time social chatter on X where tweeters post messages about cryptos using the $cryptoticker. We generate two kinds of sentiment signals which is unique to all other platforms. The first sentiment signal Market Prophit produces are from all crypto prognosticators on X and derives aggregate sentiment and other indicators for 9,000 cryptos. Below is an example of current sentiment of Chainlink that is derived from overall aggregate conversations on X (this sentiment is called CROWD which is the blue line) as well as a different sentiment indicator from only those X crypto bloggers that get Market Prophit’s proprietary score that measures the accuracy of their crypto calls (this sentiment is called Market Prophit or #SmartMoney which is the orange line). Both indicators are important to watch, and it is the combination of the two that can provide investors with an additional (and sometimes different opinion) as to what the two camps are saying. If both sentiment signals agree (both positive or both negative) then that is a double confirmation giving an investor potentially more confidence and conviction into what is being expressed. But it is also important to watch when these two sentiment signals disagree (one is positive, and one is negative). When this happens, it can signal an inflection point in the potential future price direction and that disagreement can provide an additional insight when an investor is doing research on a cryptocurrency amongst of course other information (fundamental as well as technical indicators).

Currently the sentiments for Chainlink from the CROWD and the Market Prophits are both bullish, which shows strong agreement between the two different camps.