Is Bitcoin a Safety Net Like Gold?

As a decentralised asset with a fixed-supply schedule programmed into the code, Bitcoin in many ways was intended as an antidote to the excesses of monetary policy and a centralized banking system.

Today, Bitcoin has perhaps never been more relevant. In the wake of the 2008 financial crisis, central banks around the world fueled the economy with cheap money through quantitative easing and expanding balance sheets. Today, we may be starting to see some of the fallout.

Since Bitcoin’s creation, its supporters have proposed it as a means to help curtail hyperinflation and the poor monetary policies creating cheap money out of thin air. In this article, we’ll take a look to what extent Bitcoin is actually being used as a hedge against global uncertainty and inflation.

In contrast, Bitcoin’s fixed-supply schedule, which is programmed into the code, makes the “hedge against inflation” narrative particularly compelling in the face of runaway monetary policy and economic crisis. In countries like Venezuela, where the government has introduced capital-flight measures, the censorship-resistant properties of Bitcoin also become extremely valuable: without your private key, no one can take away your Bitcoin or control whom you can send it to.

While the narrative of Venezuelans using Bitcoin is enticing, it remains to be seen whether the data actually back this up.

LocalBitcoins, a popular site for buying and selling Bitcoin, shows explosive growth in volume for Bitcoin trading as measured in Venezuela’s bolivar as inflation has spiked.

Looking at the volume of Bitcoin traded in Venezuela measured by actual Bitcoin, we see a different story:

While Bitcoin has many properties that can make it useful for Venezuelans, it remains to be seen whether people in countries like Venezuela are actually adopting Bitcoin in droves. To suggest that Venezuelans taking up Bitcoin at massive scale is perhaps misleading, and potentially even damaging. Bitcoin, despite its many merits, has a long way to go, and it’s far from providing a solution to the long-term economic crisis faced by Venezuela.

This stockpile of negatively yielding debt could perhaps be traced to a decade of loose monetary supply and aggressive quantitative easing, which pumped the global economic system full of cheap cash. Bitcoin, as a fixed-supply-schedule asset, may be becoming an increasingly attractive hedge against systemic risk in the global economy.

In an article on Bitcoin and modern portfolio management, Galaxy Digital Research points out:

It’s important to remember that Bitcoin remains a speculative asset, and there isn’t enough data to statistically show whether investors are using Bitcoin to hedge their portfolios against a global economic collapse. However, one research study took a traditional portfolio of 40% equities allocated to the S&P 500 index (SPX) and 60% to fixed income allocated in the iShares Barclays Aggregate Bond Fund (AGG) and measured its performance since December 2013. They found that allocating 6% of that portfolio to Bitcoin, 57% to the SPX, and 37% to the AGG resulted in a total 10.2% return since December 2013— higher than the 7.3% return of the ‘traditional’ 60–40 portfolio.

As Tim Enneking, Managing Director of Digital Capital Management and Mana Companies Asset Management says:

While Bitcoin has key attributes that may make it valuable as a hedge against macroeconomic factors in the future, it’s important to keep in mind that crypto remains today a highly speculative asset class that is extremely volatile. Bitcoin may be seeing some usage as a hedge against inflation in countries like Venezuela (which represents a unique case study) or against a monetary policy, but we’re still a long way from widespread adoption. As the global economic outlook begins to cloud, we may be about to witness how Bitcoin performs as a hedge during a recession.

About Revix

At Revix, we’re driven to empower everyday people to become their own wealth managers. Cryptocurrencies have been our first investable category. We offer Bitcoin, a regulated gold tokenised-commodity called Paxos Gold, and 3 ready-made crypto Bundles. These Bundles are like the S&P500 for crypto, and offer passive diversified exposure to the crypto asset class. Investing is as easy as signing up, choosing an asset, and then watching your portfolio grow.

Disclaimer

This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose and before investing, please take into consideration your level of experience, investment objectives, and seek independent financial advice if necessary.

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