Bitcoin turns 15 years old next January and asset classes that are teenagers, as is the case with human teens, are considered young. Thing is about youthful asset classes, that lack of age often fosters considerable debate about the underlying investment thesis.
Today, bitcoin’s investment continues evolving. However, there are some pillars market participants, particularly those new to the cryptocurrency realm, should note. One of those pillars is scarcity. As in the maximum of amount supply of bitcoin that there will ever be is 21 million. Scarcity is one of the primary reasons why the asset is often referred to as “digital gold.” While the supply of gold isn’t infinite, miners find new sources, but it’s impossible to define bullion’s supply limits on par with those tied to bitcoin.
“Central banks around the world have ushered in unprecedented growth in money supply, effectively eroding their currencies’ purchasing value. In comparison, Bitcoin’s limited supply and increased mining difficulty over time may support the idea of Bitcoin as a long-term store of value and as an alternative to gold,” according to VanEcck research.
Adoption Bolsters Bitcoin Investment Case
Another critical element in the investment thesis is broadening adoption. In the digital currency’s infancy, critics widely viewed as a speculative, volatile asset without much utility in traditional investment portfolios.
In recent years, that view has considerable fashion as more consumer-facing companies as well as traditional banks and asset managers are embracing bitcoin. The broadening institutional investor audience could be a pivotal long-term catalyst.
“Bitcoin interest among institutional investors has also increased. Hedge funds, asset management firms, and endowments are increasingly recognizing bitcoin’s potential as a store of value and as an effective portfolio diversifier, specifically, when looking through the lens of an uncorrelated asset that has the potential to hedge against inflation,” adds VanEck.
Perhaps owing to the aforementioned gold comparisons, bitcoin has been discussed as an inflation-fighting asset. The digital currency might need more seasoning to that effect, but the reality is central banks can’t just push a button and create more bitcoin, but they can do that with fiat currencies. Should bitcoin improve as an inflation fighter, so would its relevance as a store of monetary value. In turn, more asset allocators could use the cryptocurrency in portfolios.
“An allocation to Bitcoin may also enhance the risk-return profile of institutional investment portfolios,” concludes VanEck. “A small allocation to Bitcoin significantly enhanced the cumulative return of a traditional 60% equity and 40% bond portfolio allocation mix while only minimally impacting overall portfolio volatility.”
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