Bitcoin is a touchy topic.
There’s a lot of people out there who seem to think it’s all one big scam. It’s a fair assumption given that the opacity of the industry. blockchain technology is an emerging new technology that has many promised uses and fairly, threatens to disrupt the way the world is run – which is why governments, banks, and regulators oppose it.
The whole point of blockchain is to remove control from any one individual and normalise a market, whereas government bodies would prefer to keep control of it – particularly the Federal Reserve in the role of propping up the US stock markets.
This is where my first point comes in.
#1 – I think we’re headed for inflation and I’m bullish on store of value assets such as gold, bitcoin, and Treasury inflation protected securities.
I think we’re going to see a period of fiscal stimulus that will go through the roof. We’re already seeing it. China just injected $174 billion US dollars (1.2 trillion yuan) upon the outbreak of the corona virus hitting the economy.
Think about that for a minute if you will. Just sit the hell down and think. The virus’s normative impact on businesses are to curb earnings and to send share prices down.
This is normal.
Healthy in fact.
Fiscally unprepared businesses die off and the healthy ones get to stay alive and pick up the pieces.
Instead, like an advanced game of musical chairs where more and more chairs, the governments (both US and China) are electing to add more cash into the system hoping liquidity keeps the whole system up.
Printing cash has a cost. That cost is inflation.
When inflation happens, interest rates tend to jack up naturally or the whole economy goes into the Weimar currency scenario, or, more recently, the Venuezela hyperinflation, where stacks of dollars can’t buy you a damned thing – well I guess you can buy a chicken.
Do you think that the US economy or the Chinese economy will let things go there? Implode? Give up being a world superpower?
Of course not.
The governments will simply hike up rates once they see that they can’t hold on anymore and let nature take its course.
But by the time that happens, real return in dollar terms would have dropped drastically for most investors. Who gives a damn if you make 1000% returns on a stock and get paid in USD that can only buy a chicken?
Nobody would care about your returns. You just barely kept your head above water.
That’s why its critical to add inflation protection to your portfolio. Your investments are denominated in dollars and that dollar has a set value to it that gets eroded every time the Fed prints more money.
#2 – Ok, but inflation can be protected from in multiple ways. Treasury Inflation Protected Securities are one way. Why should I do Bitcoin?
The simple answer is a free look. Otherwise called optionality. Look. TIPS are good, okay? There’s no denying that. You wanna hedge against inflation, go for that. But that thing rises with the value of inflation. Nothing more. It’s a 1:1 rise kind of thing.
That’s not what I’m looking for. I’m not in the markets to make $1 for every $1 I invest. Sure. It’s good. But the maths break it. I’m human. You’re human. Most of our decisions will see some setback or mistakes. We need to have big wins if we wanna generate positive returns over the losses. That means we need 10 to 1, 20 to 1 ratios of risk:reward. Bitcoin does all of that. You don’t need to put a lot of money in. Just 5% of your portfolio allows you to hedge against inflation. Even better. When(not if) the world recognises the many happy benefits of fiat currency (one of the major ones being no more quantitative easing screwing fundamentals!!), bitcoin’s value will be the kind of generational wealth transfer that leaves most people in awe.
I like that edge – the edge where I’m hedged against inflation and I get a free look/optionality on a vast increase in the price of bitcoin as opposed to simply protection from inflation and minute increases in value.
#3 – Ok but still, Bitcoin can go to zero in a hurry as opposed to TIPs. Where’s the reward if bitcoin doesn’t go up?
That’s a fair point. I’ve said optionality matters but risk comes along with it. So what makes up the good for the bad? Well for one, bitcoin, like other financial assets has deriviatives that allow you to gain an edge in the markets. You don’t just have to sit on it. You can lend it out for sky high rates. Sell covered call options. There’s a whole list of ways you can generate more value with what you have in bitcoin. That’s the amazing part to me.
- free protection against inflation since bitcoin functions somewhat like digital gold.
- Free upside when Bitcoin spikes
- Continued utility to make positive returns even if it doesn’t spike.
That’s just way too much reward for a small percentage of my portfolio. Well worth the money I say.
Christopher Long, our cryptocurrency expert holds periodic talks on the cryptocurrency world, its latest developments, and the investing opportunities within. If you’d like to find out more, you can do so here.
Behavioural Psychology fanatic. I like good food, movies, intelligent conversations and logical reasoning. I also dabble with options, factor-based investing, and data analytics.