Updated: Feb 9
When Bitcoin first started out, investors were confused as to why they are being traded. They were not too sure if it had any substantial value in the first place. However, with countries such as China digitalizing its currency, there could indeed be a place for Bitcoin in the future.
Bitcoin is typically seen as an inflation hedge mainly because of its limited supply, which is not influenced by its price, and because of its relative attractiveness when real yields head to close to zero or maybe even lower. Yet, when you buy bitcoin, you’re not just doing so to hedge inflation. You’re buying bitcoin to hedge all the other negative consequences that usually accompany it.
Inflation is not always bad. “Good” inflation, a result of economic growth and low unemployment that helps to close the gap between supply and demand, encourages investment and consumer spending and even more economic growth.
Traditionally, inflation moves in tandem with the strength of the local economy. But it can be triggered by currency weakness, which raises the prices of imported goods. This is usually corrected when the central bank raises interest rates to combat rising inflation, which increases the attractiveness of the currency compared to others.
But in the current pandemic-stricken environment, an increase in interest rates may have the opposite effect, given the potentially catastrophic impact on debt-ridden economies. The U.S. bond market is telling us that it thinks interest rates will rise. Most of the Bitcoin trading is denominated in dollars, therefore, if the dollar heads lower without a corresponding fall in the value of Bitcoin (and since it’s unrelated to the economy) the BTC/USD ratio heads up. Hence, Bitcoin is a hedge for not just the macroeconomic ills that we have been trained to watch out for. It can also provide balance against the unforeseen problems waiting to occur.
Furthermore, some of the top asset management firms like One River Asset Management and Ruffer Investment Company, which manage millions worth of assets, have added Bitcoin to their portfolio. One of the equity strategists said that he removed 50% of his equities hedge from gold to bitcoin. Traditionally, gold is seen as a hedge for inflation but in this case these asset management firms feel bitcoin is a better hedge against inflation in the short term as compared to gold.
In conclusion, in our ever-changing macroeconomic outlook where the world as moved from orthodox monetary policy to Keynesians Economics and then to unorthodox monetary policy. There is a need for something new in the economy such as bitcoin to spur the economy forward in these troubling times.