In this article, Neel Popat, CEO, and Co-Founder of Donut, a personal investing app in the cryptocurrency space, shares 3 reasons why bitcoin is an attractive hedge against inflation, and examines why the list of investors adding Bitcoin to their portfolio is getting increasingly impressive.
History Has a Habit of Repeating Itself
Governments have always taken on debt in times of need and then printed money to reduce the value of the national currency (and therefore debt itself) through inflationOpens a new window . But other than making you wish you had a magic printing press that reduced the value of your credit card debt right now, why does this matter?
Because money printing creates inflation, which reduces the value of your dollars—your savings, your investments, the bills sitting in your wallet. If only there were an asset to save you. An asset that couldn’t be controlled by governments and central banksOpens a new window . An asset that would not only hold its value, but potentially appreciate in inflationary times.
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Currencies Have Values Too
Currencies don’t just have value, they have values.
Fiat currencies like the U.S. dollar are founded on the value of centralized control. The currencies are backed by a national government and can be controlled through monetary policy to manage the economy and maintain stable inflation and growth. Unfortunately, the flip side is that they can also be used to serve the political interests of governments. This is why independent central banks were invented in the early 1990s – to prevent governments from manipulating the economy before elections and to serve their own agendas.
Since the Financial Crisis of 2008, Central Banks like the Fed are now independent in name only. They have been keeping interest rates low and printing money to finance historic levels of government stimulus – first to bail out the banks in 2008, and now to bail out big corporations in 2020. The problem is that as long as governments have an incentive and an ability to manipulate the value of a currency, they will do it.
This is precisely why Bitcoin was created in 2008 and why its values are different to those of fiat currencies.Bitcoin is anti-inflation. The supply of the cryptocurrency is fixed, which means that its value cannot be manipulated through money printing, in the way that any fiat currency can. Bitcoin is also based on the value of decentralization. It is separate from the established system, which is particularly attractive at a time when the specter of inflation is looming larger than ever.
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Inflation on the Cards?
It’s not just the unprecedented amount of government stimulus that’s creating an inflation risk, it’s also the retreat of globalization.
With more countries, including the U.S., looking to bring their supply chains back to home soil post COVID-19, the price of internationally traded goods will suddenly increase, leading to more inflation as prices rise.
All of this has massively increased the probability of a period of prolonged inflation, which means your hard earned dollars are going to be losing value even faster than they are now as they gather dust in your savings account, earning 0.1% APY.
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Enter Bitcoin as an Inflation Hedge
In inflationary times, money flocks to so-called ‘safe haven’ or assets which tend to hold value well over time. Gold is the classic haven asset used as a hedge against inflation – it has been around for thousands of years and continues to hold value to this day.
So what’s the case for Bitcoin here as a store of value? Doesn’t it swing wildly in value from day to day? Cryptocurrencies Opens a new window like Bitcoin Opens a new window are volatile, but crucially they are decentralized digital assets immune to the government or central bank manipulation.
Currently, global cryptocurrencies are worth $265 billion with almost 70% of that share accounted for by Bitcoin – and leading investors are taking notice. This May, Paul Tudor Jones, one of the world’s most successful investors, announcedOpens a new window he was transferring a small percentage of his fund’s assets into Bitcoin as a hedge for inflation and he’s not alone. As Barry Silbert pointed out in a recent tweet, the list of investors betting on Bitcoin Opens a new window is starting to look pretty impressive – on top of Tudor Jones, there’s Marc Lasry, Bill Miller, Mike Novogratz, Raoul Pal, Chamath Palihapitiya and Peter Thiel.
There are three key factors why Bitcoin is an attractive hedge for inflation.
1) Purchasing Power
When Bitcoin founder Satoshi Nakamoto created the cryptocurrency in 2008, in response to the flaws in the financial system exposed by the Financial Opens a new window Crisis, he fixed the supply at 21 million. This means that Bitcoin can never be devalued by money printing and inflation in the way that the U.S. dollar or any other currency can.
2) Liquidity
In times of crisis, liquidity matters a lot. With bankruptcies and job losses at record levels and set to continue, companies and individuals need to be able to convert their assets into a form of money they can use quickly. Fortunately, Bitcoin is the only store of value that is traded 24/7 throughout the year.
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3) Portability
The current pandemic has made the improbability of closed borders a reality. For the first time in a long time, we’ve been exposed to the possibility of geographic upheaval that makes being able to transfer your assets across borders more important than ever. In this respect, Bitcoin is better than any other option because it can be stored on a phone or computer and transferred at the tap of a screen.
All of these factors make Bitcoin a very attractive option as part of a balanced portfolio at a time when the risk of higher inflation in the medium term looks more likely than ever in recent history.
History is repeating itself as the U.S. government continues to pump the economy with stimulus funded by money printing from the Fed. This is creating inflationary pressure that could squeeze the value of your dollars even more, making assets like Bitcoin more attractive. Bitcoin is designed to hold value over time because of its limited supply, it’s liquid and traded 24/7 and can be transferred across geographies making it an attractive haven asset that’s here to stay.
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