Bitcoin an inflation hedge?

“Can Bitcoin really offer protection against inflation?” As ever, the answer to such a  question remains uncertain and only time will tell if we do, indeed, see the vast amount of  cash which has been pumped into the global economy result in a sustained increase in  inflation. Notably, the FED has recently confirmed that inflation is likely to rise and be  persistently higher than was anticipated, and for longer than was expected just a few  months ago. It is worth remembering, though, that the current fiat-based currencies are  only 50 years old. On the 15th of August 1971, US President Nixon, in effect, ended the 25- year-old Bretton Woods system by no longer enabling one to convert US$ into gold. Fifty years ago, many jurisdictions’ national currencies were pegged to the dollar and in reality the US’s actions ended a gold-based system which had been the norm before. Today, as  more and more people question the sustainability of fiat-based currencies, Jim Reid at Deutsche Bank, has summed up the current situation in a thought-provoking manner: “Interestingly, today crypto is starting to build up the strong passionate advocates that gold  has had in the past. It also, however, attracts ridicule and disbelief. Whatever happens going  forward, views, orthodoxy and money systems do change over time. Fiat money has only  been the dominant framework for a small fraction of history and as such it shouldn’t be too  controversial to suggest it may not always be the system of choice. With endless structural  deficits and extraordinary levels of money printing, we have certainly stressed its flexibility in  recent years. Will there be a point when it breaks rather than bends?” 

Of note, Bitcoin has rallied from $40,000 to over $58,000 in the last few weeks and the US’s  largest bank, JP Morgan, believes this recovery is due to “the re-emergence of inflation  concerns among investors and they are trying to use Bitcoin as a hedge”. Furthermore, JP  Morgan claims the three reasons helping to explain Bitcoin’s recent price pick up are that: 

• both Federal Reserve Chairman, Jerome Powell, and SEC Chairman, Gary Gensler,  reported to Congress this week that they had no intention in banning 

cryptocurrency, as China had. The SEC claims it is taking a different approach to  China, focusing on investor protection and regulation. 

• the recent increasing use of the Lightning Networks enables Bitcoins to be sent  extremely fast and are gaining more attention “helped by El Salvador’s bitcoin  adoption,”  

• JP Morgan clients since the beginning of 2021, $10+ billion has flowed out of gold  exchange-traded funds (ETFs) and $20+ billion has gone into Bitcoin funds. 

• Price of Bitcoin v Gold 

Source: Goldmoney 

Certainly, Bitcoin’s recent rally has helped it to out-perform gold. One the challenges that  Bitcoin and other cryptocurrencies face is that they are still a relatively difficult asset class  for many institutions to invest in. After all, gaining access and safely holding Bitcoin requires specialist knowledge for private investors too. According to the Australia Financial Review, a survey of 2768 people in Australia found 23% of respondents wanted their pension funds to  include crypto assets and, of the 5134 people who already owned crypto assets, 67%  wanted to be able have cryptocurrencies as part of their pensions and savings. Millennials  were found to be the most eager for crypto-exposure in their pension funds, with 40% of  respondents born between 1981 and 1996 agreeing or strongly agreeing that  superannuation managers should include this asset class. 

According to Canada-based company, Goldmoney: “The implications and prospects for fiat  currencies’ purchasing power is dawning on the millennials who half understand the  monetary problem. It has yet to dawn on the wider public…..Chasers of the crypto money  mirage would do well to dismiss the hype and inform themselves properly about money.  Gold has been true money throughout history, always re-emerging when fiat fails. No fiat,  no electricity, no bitcoin”. What with the cost of energy prices rising, a lack of labour due to  high unemployment, and on-going supply chain challenges creating shortages of goods, it is  easy to see why we could see inflationary pressures mount. As ever, the key to a successful  portfolio is diversification – hence we are likely to see inflation hedge old favourites such as  gold and real estate to attract investors’ attention as well as Bitcoin.