Is Bitcoin a Viable Hedge Against the Great Monetary Inflation?

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When a billionaire hedge fund manager like Paul Tudor Jones with over 40 years of experience in the global financial markets admits to being “left speechless”, you know 2020 has been no ordinary year.

The COVID-19 pandemic has dominated headlines throughout the year and had a dramatic impact on the global economy, much of which economists are still struggling to make sense of.

Whilst people all around the world have been forced into lockdowns in an attempt to survive the pandemic, governments have embarked on massive quantitative easing in order to save their economies. Most have sought refuge in the double-edged swords of stimulus packages and money printing.

Whilst global quantitative easing efforts have helped to reduce the overwhelming burden of the COVID-19 pandemic on citizens, such a significant injection of money into economies has given rise to what Tudor Jones and Lorenzo Giorgianni call in their article the “Great Monetary Inflation (GMI) — an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”

With global debts rising, central banks are the entities most commonly charged with funding these deepening black holes. The end result is that fiat currencies are losing value before our very eyes. It is likely that this will only accelerate with time due to the constant liquidity injections being performed by governments in the face of the pandemic.

The developing world, on the other hand, has witnessed an inflation scourge that is steadily wiping out the middle-class in terms of purchasing power and pushing more and more people below the poverty line. As these fiat currencies become more and more unsustainable, it is natural to predict that investors will turn to inflation-proof assets as a hedge against the GMI.

In fact, Anatoly Crachilov, Founding Partner and CEO at Nickel Digital Asset Management has already seen a significant upsurge in interest from those looking to digital assets as a potential safe haven:

“The investment thesis of digital assets offering powerful inflation protection is being increasingly accepted by forward-looking investors. Indeed, verifiable and immutable scarcity enforced by the Bitcoin protocol created a perfect asset, capable of protecting capital at the time of the printing press being used at full capacity by central banks around the world, leading to inevitable erosion of existing capital. Family offices, mandated with capital protection, were the first movers to embrace this new inflation hedge, followed by the hedge fund management world. Now we are seeing traditional asset managers and, increasingly, insurance companies exploring allocation to this asset class”. He said.

It is no surprise that Gold, a 2,500-year store of value comes top of Tudor list of rank-ordered inflation hedges. But the appearance of Bitcoin at number 4 on the list — particularly considering Tudor Jones’ success in traditional markets — may well raise plenty of eyebrows.

Many retail investors and cryptocurrency advocates have long been invested in Bitcoin, however there is no mistaking the increased institutionalized involvement in the space in recent months.

The world’s foremost cryptocurrency is near its all-time high value of around $20k, with billionaire Mike Novogratz predicting that Bitcoin’s price will climb as high as $65,000.

Tudor Jones and Giorgianni look beyond price speculation when coming to their conclusion on Bitcoin’s suitability as a GMI hedge though.

Being a baby boomer himself, Tudor Jones admits to initially being a Bitcoin sceptic. Though he still managed to turn a decent profit when testing the waters with a small investment before the last bull run reached its climax in 2017.

Three years later, Tudor Jones cites Bitcoin’s potential as a store of value, for making it an altogether more attractive proposition in 2020. “The GMI caused me to revisit Bitcoin as an investable asset for the first time in two and a half years. It falls into the category of a store of value and it has the added bonus of being semi-transactional in nature. The average Bitcoin transaction takes around 60 minutes to complete which makes it “near money.” He said.

Considering four characteristics; Purchasing Power, Trustworthiness, Liquidity and Portability in order to compare four key financial assets — Gold, stocks & credit, cash and Bitcoin, Tudor Jones and his research group, scored Bitcoin as the 4th strongest ‘store of value’.

However Tudor Jones said of the research: “What was surprising to me was not that Bitcoin came in last [of the four mentioned assets], but that it scored as high as it did. Bitcoin had an overall score nearly 60% of that of financial assets but has a market cap that is 1/1200thof that. It scores 66% of gold as a store of value but has a market cap that is 1/60thof gold’s outstanding value. Something appears wrong here and my guess is it is the price of Bitcoin.” Food for thought indeed.

Tudor Jones also credits the “brilliant feature” of built-in scarcity, which almost makes Bitcoin an inflation-busting hedge all on its own. By design, there will only ever be 21 million Bitcoin mined, of which around only 10% remain to be introduced to the market. The remaining amount will also be released in ever decreasing quantities as the mining rewards halve, approximately every four years.

Bitcoin’s limited supply, and emergence as a store of value, may also form part of a perfect storm as the digitization of currency everywhere is accelerated by COVID-19. A factor which Tudor Jones calls “the most compelling argument for owning Bitcoin”. The way people interact with money is changing all over the world. From paper, to cards, to electronic transfers and contactless payments, the march towards digital money is relentless. Soon Facebook’s digital currency Libra will impact the mass market and China’s DCEP will hasten the adoption of digital wallets for swathes of the world’s population.

According to the USA Herald, the revolution may already be further along than we think. They report that “German-based bank Deutsche Bank has noted an increasing number of investors are beginning to prefer Bitcoin (BTC) as a store of value over gold due to its keen ability to hedge inflation”.

Will Tudor Jones, Giorgianni et al prove to be right about Bitcoin’s emerging power as a GMI hedge? Time will tell. But the man with his finger on the pulse of digital asset market, Anatoly Crachilov can already see the writing on the wall:

“If traditional gold does well, Bitcoin, the digital representation of the gold, will do even better. After all, it possesses all key attributes of gold, including scarcity, durability, and portability, whilst offering another important angle — it is a powerful technology play, offering global transmission of value over wires in a decentralised manner, something traditional gold clearly lacks. This makes bitcoin a significantly more appealing investment asset, which has already been revealed through price divergence between the two assets. Indeed, while gold is up 20% this year, it is not even near the 160% YTD growth delivered by Bitcoin as of November 30, 2020. We are likely to see reinforcement of this divergence trend going forward.”

You can read the full article: ‘The Great Monetary Inflation’ in Nickel’s Crypto Library, designed to help investors navigate the digital asset space

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