In the past few months we’ve seen record breaking inflation and the corrosion of our purchasing power; and it may be worse than you think. Decentralized Finance (DeFi) may be one of the last investment safe havens available to help combat our current conditions.
My name is Erik and I started 2022 by enthusiastically waking up at 8:00 AM on January 1st and sending my two-week notice email to my employer without having another job in place. A strong way to start the new year.
However, what proceeded the warm sun beating on my smiling face while driving to my last day of work was more than a year of cold numbing frustration with regards to my work-life balance and overall career.
Like a large portion of people — just look up the record number of people quitting their jobs right now — I feel like the pandemic has been particularly difficult and frustrating for a lot of employees; especially for those with customer service oriented jobs. I can relate.
I was a top performing Community Manager for a couple of multi-family property management companies before and throughout the pandemic. I oversaw almost everything from leasing, budgeting, marketing, customer service, compliance, and even maintenance of newly built communities. I’m the one you’d talk to about your upstairs neighbor jump roping at 5:00 AM, your dishwasher line exploding and flooding the apartment, and (particularly pertinent to the pandemic) how we could work with you to get rent paid so your family wasn’t at the risk of being homeless. These and many more issues were continuously brought to my attention as more and more people were either forced or chose to work from home. Add that on top of Utah’s real estate and rental economy exploding, forcing us to push rents higher and higher, and inflation rising higher than an annual salary increase, and you have a fairly straight forward formula:
Increased work stress & hours + upset customers + diminishing purchasing power = Erik goes bye-bye
So now what? I haven’t gone into work, submitted a resume, or received a regular paycheck for more than three months. On the other hand, I have gone to several blockchain related meetings and conferences, met and networked with amazing people, and have become more financially secure than I’ve ever been. That being said, my hope and purpose of writing this article is not to talk about how to 10x-100x your investment (“wen lambo?!”), but to explain how you can at least utilize and benefit from one aspect of blockchain technology to overcome what’s eating away at your earnings and stealing the purchasing power of your savings; inflation.
This is fairly basic, but inflation is the decline of purchasing power of a given currency over time. Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy. You’ve probably experienced this at the gas station; because of inflation, the amount of gas that you now get with $20 is substantially less than it was a couple of years ago, meaning that you now must spend more money to fill up your gas tank. Like I said, pretty basic stuff. BUT do you know how inflation is measured and how it’s calculated? Do you know if the method used to calculate inflation has changed or if it is accurate? Let’s get into the weeds.
How is Inflation Measured and Calculated?
Inflation is commonly measured using the Consumer Price Index (CPI). When you hear that March’s inflation rate was 8.5% for the year, that number being reporting is more than likely the CPI. The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The current methodology and basket of goods used to measure CPI, and therefore inflation, is based on the price changes of items associated with the cost of living; which is called the Cost of Living Index (COLI). To put it simply:
Inflation % ≈ Consumer Price Index (CPI) ≈ the change in price of everyday “cost of living” items
If you want to go deeper on why there’s a controversary behind this methodology, why the items and weights of the basket of goods were changed, and how those changes are more than likely underreporting the inflation number so that it’s not representative of your out-of-pocket expenses, then I highly recommend that you watch this video from Coin Bureau as well as read this article by John Williams. It will be well worth your time. To illustrate why this is important, especially for Utahns, I’ll go over the example of how housing and rental costs are calculated.
How the CPI Measures the Cost of Shelter
It may be shocking to find out that the CPI (and therefore the reported inflation number) does not measure the price increases of property, but instead measures the cost of rentals. For people that own their homes, they try to calculate this “rent” by something called Owners’ Equivalent Rent (OER). To get this value, they basically ask homeowners, “if someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?” In my opinion, this is an idiotic approach. Coming from a property management background, I can confidently say that homeowners have no idea what current rental rates are and consistently undervalue the rate at which they would be able to rent their homes. Honestly, from my experience, there are even many property managers who undervalue the current market conditions and the rental rates that they could charge, which could be attributed to antiquated software with little to no pricing analytics, complacency of only focusing on a high occupancy rate, and the overall difficulty of trying to keep up with the absurd price increases for Utah rentals. To further illustrate how cost of shelter if poorly calculated, the average cost of rent is underreported because the rental prices for leases that are not up for renewal are also included in the calculation. This means that 100% of “rents” are calculated, even though there may be only ~8% of the rental leases renewing for a particular month, and thus being available to receive a rent increase that more accurately reflects the current market conditions; leading to a lagging indicator.
To put this into perspective, the March 2022 CPI measurement for the cost of housing was only 5.0% year-over-year (YoY), which is extremely low, especially when compared to Utah and Salt Lake City. The price of homes in Utah rose ~26.0% YoY, and rentals in Salt Lake City had rental rate increases of 21.7% YoY for 1-bedrooms, and 43.2% YoY for 2-bedrooms. The disparity between the reported inflation and how it realistically impacts peoples’ finances is absolutely staggering.
Real Life Impact
Because of methods like this, as well as many others, some experts estimate that a more realistic “out-of-pocket” inflation rate is closer to 15%-17%. Let us repeat that to make sure it sinks in. For March of 2022, a more realistic inflation rate, that you’re probably feeling in your wallets, is more than 15% vs. the reported 8.5%.
That means that if you were lucky enough to be given a 3% salary increase from your employer, you still lost 12% of your purchasing power for the new money that you earn. For example, say you were being paid $63k last year and received a 3% pay increase so that you’re making closer to $65k this year. Due to inflation, your purchasing power of that money is really closer to about $55k when compared to last year. You just lost $10k in purchasing power…Oof!
Another way to put it, say you had $10,000 sitting in your savings account. Compared to last year, that money is now “worth” $8,500. You just lost $1,500 in purchasing power…Oof #2!
So what can you do to overcome, or at the very least help mitigate, inflation from eating away your hard earned money in your savings account? The answer for me has been Decentralized Finance.
Decentralized Finance (DeFi) is the use of blockchain technologies and cryptocurrencies for financial services. Since DeFi uses blockchain technologies, like smart contracts that act like automated computer code to perform functions, you don’t need a centralized or third party company, like a bank or credit union, to facilitate transactions. This allows for transactions to occur faster and with less fees, helps maintain more control of your finances, and anyone with an internet connection can use it without needing approval; aka freedom.
One of the easiest ways to earn a relatively high rate of return on your money with cryptocurrencies to help fight inflation is staking. To explain what staking is, I’ll explain how it compares to a traditional service, like earning interest through your savings account, in the style of Urban Dictionary; we’ll call it Urban Cryptionary.
Is DeFi Worth It?
Here’s just one example to wet your whistle and get you more interested in what can be a truly life changing learning experience.
How much is the average savings account interest rate in the United States? The answer is a depressing 0.06%. That means if you had $40,000 in your savings account, after a year you would earn an additional $24.00. Yay! Your bank just paid for your chipotle, with extra guac of course, for you and your friend.
CD’s (Certificate of Deposits) aren’t much better. According to Bankrate’s most recent national survey of banks and thrifts, the average rate is 0.22% for a 1-year CD, 0.39% percent for a 5-year CD, and 0.40% for a five-year jumbo CD.
Alternatively, using one of the easiest DeFi methods, like Gemini staking, can earn you 6.9% APY! (For the experts, I know Gemini isn’t fully DeFi and is considered “CeFi”, which I’ll discuss that a little later). If you were to take that $40k from the previous example and deposit it into the Gemini exchange (analogous to a bank) and stake it into their GUSD stablecoin trading account, the amount earned would be $2,760! Also noteworthy, by using a stablecoin (which is a cryptocurrency that is pegged to the US dollar), you eliminate the larger swings that other cryptocurrencies can sometimes experience. Furthermore, this particular method compounds daily and has no lock-up period, which enables you to withdraw your funds at any time. Think about that. One simple adjustment can earn you ~115x greater than your bank! You read that right, 115x!
If you want to go down the DeFi rabbit hole and receive even higher returns, there are other projects and protocols that you can earn up to 20%+ APY. One such project is Giddy; and bonus, it’s a local Utah company. At the time of writing this, their DAI stablecoin pool is earning ~0.25% a day, which equates to about ~90% per year! Now that $40k has the potential to earn $36k. That’s **1,500x **greater than the average savings account.🤯
How to Start Investing in DeFi
I’m not going to lie, crypto can get very confusing very quick. Even for me, despite allocating a large amount of time to researching and learning about the sector, the industry is growing so rapidly that it’s like drinking water through a fire hose. There is a myriad of great DeFi projects to learn about and invest in, but Giddy is one of the projects that I’m most excited about. They’re planning on releasing their mobile app (which you can download HERE) in the summer, which will allow you to invest in DeFi projects without having to spend days upon days researching and trying to figure out how to do so. Additionally, the technology behind the app addresses several security risks common to DeFi (such as front running and infinite approval vulnerabilities), allows for gas fees to be paid in any token, and helps create a secure non-custodial wallet. (Did you know that that ~20% of all Bitcoin has been lost?) These features, and many others found within their Litepaper, will help make investing in DeFi as easily and safely as possible for experts and beginners alike.
A few days ago, I received a piece of mail from Chase promoting their “high” interest savings account of 0.10% APY. Lucky me! If I didn’t like that choice, how about a 3-year CD of 0.6%? Wow, I’ve truly been blessed for this amazing opportunity to 6x my investment in their CD versus just keeping the money in their savings account! I haven’t been this lucky since I won a free Big Mac playing the Monopoly game at McDonalds. If you can’t tell, I’m being facetious. Those rates are absolute hot garbage, especially when coupled with the record (underreported) inflation that we’ve been seeing. I mean, it’s better than having the money do nothing, but if inflation continues to ravage the economy, the miniscule percentages gained are going to be dwarfed by the major percentages lost. I believe that understanding and investing in DeFi, and the underlying technologies, is one of the best ways to combat inflation, save our purchasing power, and to live a life with more financial freedom.
I hate to beat a dead horse, but when I say “life changing” what I’m really saying is, “giving you a way to do the things you want in life with the people that you love and care about, instead of punching in at a 9 to 5, working and grinding for 40 years, and then hopefully retiring to enjoy an additional 20 years”.
So now what?
Well, instead of waking up after a much too short weekend and getting ready to head into the barrage that is Monday morning work, how about you use this link (https://linktr.ee/eriktoshi) to glean additional information from articles I’ve written, learn about other projects I’m involved in, find educational resources, and more.
You. Will. Not. Regret. It. I Promise.
Maybe that warm hope-bringing sun is already breaking through to a face that’s growing a small grin of enthusiasm. Maybe you’ll be putting in your two-week notice on January 1st, 2023. Maybe you’ll reach financial independence and have a more fulfilling and optimistic life. My hope, and why I strive to be an advocate, is for you to turn those maybes into musts.