Market analysis

How to earn inflation-beating interest in a bear market

7 min read

  • Inflation across the globe is rising, while interest rates remain ultra-low in developed countries

  • As a result money is losing value at a fast pace, while inflation-beating interest is hard to come by

  • Stocks and digital assets are in a bear market, making it hard to generate inflation-beating returns from investing

  • In this environment, digital asset passive income strategies can help mitigate volatility and continue earning inflation-beating yields

  • Yield App offers up to 12% p.a.* on BTC and ETH, and up to 18% p.a.* on stablecoins

Recent months have seen inflation ramp up as the world recovers from the coronavirus pandemic. At the same time, global markets have been on a downward spiral and interest rates remain at rock bottom levels. In this bear market environment, digital assets offer an alternative source of inflation-beating interest.

Across the globe, inflation has been driven up to unprecedented levels as economies emerged out of lockdowns throughout 2021. Representing the (typically) constantly rising cost of goods and services, inflation is the means by which money becomes less valuable over time, ultimately leading to a higher cost of living. For example, in 1913 a gallon of milk cost 36 cents, while by 2013 its price had increased nearly tenfold to $3.53.

A certain amount of inflation is good for economies, with governments usually targeting 2% a year. However, recently, a combination of rampant money printing by central banks and pent-up demand during lockdowns has pushed up inflation at a much faster rate than usual. At the time of writing in January 2022, we have seen inflation hit a new record of 5% in the Eurozone, jump to a 30-year high of 5.4% in the UK, and soar to 7% in the US.

Source: Refinitiv Lipper Alpha Insight

At the same time, interest rates have barely risen from the rock-bottom levels where they have languished for several years. Any interest rate increases by central banks in recent months have been incremental, with the Bank of England (BoE) recently raising rates to just 0.25%, while the US Federal Reserve has signalled plans to slowly raise rates from the current 0-0.25%.

READ: Inflation, shrinking cash and the rise of cryptocurrency

Is inflation here to stay?

Central banks have a number of tools at their disposal to control inflation. This includes raising interest rates to encourage saving instead of spending. However, most of them have been reluctant to raise interest rates at a quick pace, insisting that the current high inflation is transitory and will soon pass.

One of the reasons for this is that the pandemic saw a huge rise in debt across the globe in 2021, as governments sought to support struggling economies. Last year, global debt hit a record high of $296 trillion, according to the Institute of International Finance (IIF), marking a debt-to-GDP ratio of 350%. In the US alone, national debt is currently $29.9 trillion. Raising interest rates makes the cost of paying off this debt higher, while inflation reduces the overall cost of debt repayment over time.

Despite this, however, we are seeing the US central bank, the Federal Reserve, begin to tentatively raise interest rates this year. While this will make it slightly more lucrative to keep money in a bank savings account, any increases will be slow and incremental. However, the threat of higher interest rates is still hitting stock market prices. 

Inflation in a bear market

Clearly, there is a discrepancy between annual price increases and the interest rates banks across the developed world are willing to pay for deposits. Meanwhile, with markets in a downward spiral, many traditional investments don’t currently offer inflation-beating returns. Against this backdrop, digital assets can be a useful alternative source of passive income.

READ: Cryptocurrency and DeFi use cases: Stablecoins for seniors

Looking at some of the recent figures can help illustrate the power of digital assets to continue beating the rising inflation in the developed world. In the US, where inflation is currently 7%, the S&P 500 index of the largest US-listed companies is down around 7% year-to-date in US dollar terms. Meanwhile, according to Bankrate, the highest available interest rate on a US savings account is 0.55%, as of January 2022.

Source: FE fundinfo

Inflation-resistant assets

In such an environment, income seekers typically look for inflation-resistant assets to continue earning a steady income. In recent years, digital assets have emerged as one type of asset that can help beat inflation and continue producing high interest, even in bear market conditions. 

One of the reasons for this is that some digital assets, such as Bitcoin, have a finite supply – limited to 21 million. Meanwhile, the supply of fiat currencies such as the US dollar typically increases over time. Therefore, it is reasonable to expect the value of Bitcoin to appreciate over time in fiat terms.

However, in recent weeks, digital assets have entered a bear market alongside traditional stock markets. The price of Bitcoin has dropped by around 21% year-to-date (as of January 31, 2022) to sit at $36,919. It is therefore important to be aware of the volatility of digital assets such as Bitcoin before making an allocation.


Passive income in bear markets

When digital assets are in a bear market and no longer offer inflation-beating returns on their own, passive income strategies can come to the rescue. Over the last 18 months, digital asset passive income strategies have emerged that are able to produce double-digit percentage annual yields on a wide range of digital assets, from Bitcoin to stablecoins.

READ: How to mitigate Bitcoin losses during a bear market

For example, Yield App offers Bitcoin and Ether portfolios that pay up to 12% p.a.* on two of the biggest digital assets in the world. At times of market stress, such as we are experiencing at the moment, such passive income can mitigate the volatility of these digital assets, earning steady yields even while markets are down. 

Meanwhile, stablecoins are also an alternative option for those looking for inflation-beating interest in bear market conditions. Stablecoins are digital assets pegged to underlying assets such as gold or fiat currencies, such as the US dollar. 

Yield App offers up to 18%* in annual interest on some of the biggest US-dollar pegged stablecoins in the market - USD Tether (USDT), USD Coin (USDC) and DAI. In an environment where inflation-beating interest is difficult to come by, this can be an attractive proposition for those looking to boost their earnings without taking on higher levels of risk. Against the backdrop of inflation and bear markets, stablecoins offer an option to sit out the volatility of other assets, while continuing to earn passive income.

READ: How stablecoins can help you increase yield in a bear market 

IMPORTANT NOTE: All types of digital assets are subject to risk. Unlike traditional savings accounts, digital asset strategies are not covered by comprehensive insurance policies and the space remains largely unregulated at this time. As a result, one should never compare traditional savings accounts and digital asset passive income strategies like for like. Never allocate any assets you cannot afford to lose to these strategies.

*The maximum 18% p.a. on stablecoins with Yield App is available to Diamond Tier users who choose to earn all of their interest in our native YLD token.

Do you want to earn the market’s leading APY’s on your digital assets? Sign up for a Yield App account today!

DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.


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