By Veronica Fulton, Research Analyst
Bitcoin is the original cryptocurrency – a non-physical currency that is created, stored, distributed, and traded on a decentralized ledger, known as blockchain making it impossible to double-spend or counterfeit. Bitcoin has been nicknamed “digital gold”, due to claims of it being inflation proof and thus a “store of value”.
Is Bitcoin a good inflation hedge? There is a finite amount of Bitcoin – 21 million to be exact. At the time of this writing there are nearly 18.8 million Bitcoin in circulation, the remaining 2.2 million are projected to be mined by 2140. Due to the fixed supply, Bitcoin bulls claim it isn’t subject to the same type of devaluation due to inflation we see in the dollar and other currencies whose supply is easily manipulated by monetary policy. Essentially, the Fed can always print more money but once 21 million Bitcoin are mined, that’s it. Here we make a contrast – there is an exact number of Bitcoin, but we have limited estimates of how much gold there is (let alone when it will all be mined). Historically, gold increases in value when dollar purchasing power decreases, making it an inflation hedge though not necessarily inflation-proof. What does Bitcoin do in response to changes in inflation? The short answer – it’s inconclusive. During times where inflation was increasing and relatively high as measured by the CPI, Bitcoin’s value remained low; however, the inverse can be said as well. Even when looking to inflation expectations, Bitcoin has both grown and decreased tremendously over periods where the 10-year breakeven rate (the nominal difference between the yield on the 10-year treasury and the yield on an inflation protected treasury or TIP) has been mild. We’ve seen large surges and declines occur in Bitcoin immediately following commentary of individuals, endorsements by companies via their balance sheets, businesses announcing acceptance of it as form of payment, and recently in response to sanctions from Chinese government on mining and trading. The price of Bitcoin marches to its own speculative drum – but not, so far, to the beat of inflation.
Is Bitcoin a good store of value? With 30-day volatility sitting above 75%, we do not believe it is a safe-haven investment by any means. For example, in 2018 Bitcoin declined by over 80%, going from nearly $17,000 to almost $3,000 in less than a year. Last year, Bitcoin surged by over 300%. This year Bitcoin plunged over 50% in a little over 3 months’ time. This kind of volatility typically does not fit the risk tolerance of most long-term investors. So, no, it is not what we would consider a good store of value.
Is Bitcoin a good asset in which to invest? Proving to be an uncorrelated asset, Bitcoin has gained the attention of many institutional and retail investors. Currently, the main investment vehicles for Bitcoin are GBTC, a trust that invests in Bitcoin outright, and mutual funds which invest in Bitcoin futures. Several companies have filed for Bitcoin ETF applications and have been denied. Last week, the SEC made it clear that there needs to be more regulation around cryptocurrency before entering the ETF universe. The recent infrastructure bill proposed a tax-reporting requirement for cryptocurrency transactions that require a broker to report those transactions to the IRS. These may look like headwinds, but for Bitcoin bulls it is, in fact, the opposite. Bitcoin is now being discussed by regulators which means the potential for more financial integration which could allow for investment from institutional money managers. While Bitcoin may not be digital gold, it still has potential to be a rare asset that could, with additional regulation, stabilize in the near future and prove to be an alternative to traditional asset classes. Judging from the market and regulators – this is still yet to be determined.
Source: Factset, Fortune, Forbes, CNBC
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