Everywhere you look prices are rising: petrol is at an all-time high, pub bosses say a pint will soon cost 30p more, energy bills are set to leap by hundreds of pounds next year, and mortgages are getting more expensive. What’s a person to do?
This strategy has worked for years — but now it’s losing its shine. $10 billion has been pulled from gold funds this year as investors increasingly turn to a newer alternative: bitcoin.
“We believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into bitcoin funds since September,” analysts at JPMorgan said in a note last week as bitcoin hit a new record at almost $67,000. The US investment bank thinks ongoing inflation will support bitcoin’s price until at least the new year.
“Government backed fiat money is intentionally designed to lose value over time in order to promote consumerism,” says Mati Greenspan, the founder of Quantum Economics and a long-time cryptocurrency advocate. “Bitcoin, on the other hand, was created as a deflationary asset, which is intended to rise in value over time.”
Bitcoin was created in the furnace of the financial crisis. The person or people who designed the original code — pseudonymous creator Satoshi Nakamoto has still not been unmasked — limited the lifetime supply of bitcoin to 21 million. This built-in limit was a repost to quantitative easing: in 2008 when bitcoin was created, central banks were printing hundreds of billions to prop up the financial system, devaluing currencies around the world at the same time.
Bitcoin’s 21 million limit should in theory help it hold its value. That makes it a potential hedge against inflation just like gold.
Hedge fund billionaire Paul Tudor Jones said this month that bitcoin was his preferred way to guard against inflation, telling CNBC it was “winning the race against gold”. Carl Icahn, another billionaire investor, told the same TV station bitcoin could be a good bet if inflation runs “rampant”.
Not everyone is convinced though.
“Cryptocurrencies have come to the fore during a decade of ultra-accommodative monetary – including waves of massive money printing by central banks – and a benign inflation backdrop,” says Jason Hollands, managing director of Best Invest. “Bitcoin has therefore yet to be tested during a period of high and sustained inflation, and higher yields.”
Inflation leads to higher interest rates. That, in turn, should create more attractive investment opportunities. At least part of bitcoin’s price is underpinned by the fact that many holders — or HODLers as they dub themselves — don’t sell. If yields start to rise elsewhere, some could be tempted to ditch bitcoin and park their capital elsewhere.
Then there is bitcoin’s volatility.
“I would not say Bitcoin is a good investment as an inflation hedge as it’s far too volatile,” says Susannah Streeter at Hargreaves Lansdown. “When it’s rising sharply, it’s obviously attractive and can lure speculators into a false sense of security, but as we’ve seen it has a tendency to drop dramatically.”
Bitcoin rose by 60% in just four months at the start of this year before promptly halving. In the last few weeks, it had boomed again. Clearly, it’s not for the faint hearted.
“In my view there are much more tried and tested ways to hedge against inflation, such as investing in baskets of commodities, equity sectors like financials and raw materials, as well as infrastructure projects where inflation-adjustments are built into the contracts,” Hollands says.
Streeter says: “If investors do want to hold crypto as a defensive strategy, it should be just at the fringes of their portfolios with money they can afford to lose.”