Bitcoin: A Smart Hedge?

There have been lots of debate on Bitcoin as a smart hedge against inflation. While numerous Bitcoin enthusiasts are of the opinion that Bitcoin is a very smart hedge, the non enthusiasts differed greatly citing the recent sharp decline in its value. 

The question is “Is this decline enough to write off the hedge-ship of Bitcoin as an unreliable investment? This question is what this write up attempts to answer. 

One of the leading voice in the Bitcoin as a smart hedge debate is that of billionaire investor Barry Sternlicht. Sternlicht, the Starwood Capital Group chairman said governments keep printing money but no one can make more of Bitcoin.

He further noted that in a world with such fiscal policies, the only “smart hedge” is Bitcoin.

According to the magnate, 2-3% of his net worth is in crypto and the price of BTC has the potential to increase to $1,000,000.

In spite of about 12% decline in Bitcoin value this past week and above 20% in the past 30 days, the billionaire investor said that Bitcoin remained the “smart hedge.”

The initiator and chairman of Starwood Capital Group said this in an event in Miami recently, adding that all this is down to the crypto’s fundamentals as well as governments’ insatiable appetite for money printing.

Bitcoin Is A “Smart Hedge”

In addition, Sternlicht also spoke on the US and how a devaluation of the dollar standard could be bad news for investors.

He painted a situation where China and other countries combines forces in economic policies aimed at devaluing the dollar. If this happens, he said, it would be best for investors if part of their investment is held in Bitcoin.

While he maintained that Bitcoin has “no function other than [as] a store of value,” Sternlicht advised that it would be wise to have it as part of an investment as “a smart little hedge.”

In a comparative analysis of Bitcoin and gold, the investor explained that the precious metal too, lacks any real value outside of what has been made of it. He posited that while people can have their gold jewelry, the same could apply to other metals be it silver, titanium, or platinum.

BTC to $1 million

Talking about Bitcoin’s future price, he noted that while volatility remains, the benchmark cryptocurrency’s value could dip again after this week’s breakdown below $50,000.

Nevertheless, he strongly believes the market is set for a reversal and that Bitcoin would eventually rise to more than $1,000,000. He opined that everyone (not just the American investors) will soon desire an asset that no one can “make more of,” and that will help the Bitcoin price.

He noted that thanks to the tiny crypto exposure, prices tanking to zero won’t be too damaging. However, not investing in it and then it goes on to hit $1 million would be a huge upset.

The American billionaire is an astute entrepreneur, with Forbes rich list for 2021 estimating his net worth to be about $4.4 billion. He says he has 2-3% of his net worth in crypto.

Starwood Capital Group currently oversees over $100 billion in assets under management.

The tycoon shared his views on bitcoin and the market outlook during “The Future of Global Financial Centers”, a Miami event organised by media giant Bloomberg.

Bitcoin A Smart Hedge? What Others Are Saying

With the puncturing of the misinterpretation that inflation in the US economy is “temporary,” investors have become more determined to find hedges against it. According to Motley Fool:

“The rate of inflation has been raising alarm among investors recently because the Fed has gone into a printing frenzy. There have been calls to stop the printing rate but so far, it has continued, causing inflation rates to shoot up.”

A growing chorus of voices have begin out touting Bitcoin as a honest hedge, including:

Paul Tudor Jones. The billionaire investor said he views cryptocurrency as a better hedge against inflation than gold, mentioning Bitcoin as “a good way to guard wealth over the long run,” calling it “a store of wealth like gold.” 

Towing the same line of thought;

JP Morgan. In an October report, the investment company told its clients, “institutional investors appear to be returning to Bitcoin, seeing it as a far better inflation hedge than gold.” The report cited assurances by US policymakers that they might not ban the usage or mining of crypto, as China has done.

There are also dissenting voices, but the bottom line is whichever side of the debate you lean towards, one thing is certain—inflation in the US and elsewhere is helping drive up crypto investing activity.

On the other hand gold, which was once the favored method of hedging against inflation among investors is no longer serving the purpose it once fulfilled. Thus investors attention is shifting toward digital asset and what readily comes to mind is the Bitcoin. 

Is Bitcoin a Good Inflation Hedge?

As inflation continues to rise, some investors are focusing on Bitcoin. Bitcoin is usually seen as a form of “digital gold” because of its potential to hedge against inflation. Whether Bitcoin is really a good inflation hedge, however, is a function of few factors.

Recently, the Motley Fool Issues Rare “All In” Buy Alert:

As the price of Bitcoin (CRYPTO:BTC) soars to new heights, inflation is additionally increasing at record rates.

Bitcoin clocked an all-time high of more than $68,000 per token recently, up nearly 300% over the past year. Meanwhile, in October the consumer price index (CPI) rose by 6.2% from one year ago, its highest in more than 30 years.

Bitcoin’s potential as an inflation hedge

One of Bitcoin’s most vital advantages over other cryptocurrencies — and even fiat currencies like as the U.S. dollar — is that it is said to hedge against inflation over time.

Quite unlike other currencies, there is a limited supply of Bitcoin tokens. There will only ever be 21 million tokens in circulation, and according to current estimates, we should reach that cap around the year 2140. Because there is a finite supply of tokens, that should, theoretically, help Bitcoin retain its value over time.

Traditionally, gold has been considered the strongest inflation hedge. The supply of gold remains relatively steady over time, and gold tends to possess an inverse relation with inflation — as inflation increases and therefore the U.S. dollar loses buying power, the worth of gold tends to extend.

However, as inflation surged over the past year, gold did not perform well. While everything from housing prices to gasoline to energy costs have soared, the worth of gold has decreased over the past 12 months.

On the other hand Bitcoin, has witnessed its price continue increasing as inflation climbs higher and higher. It appears, then, that Bitcoin could be a simpler inflation hedge than gold. Having said that, there are other factors that could impact Bitcoin’s long-term inflation hedge potential.

How will Bitcoin fare over the long run?

Although Bitcoin has had an outstanding year and has managed to hedge against inflation in recent months, it’s too soon to say how it will fare over decades.

Bitcoin has only existed since 2009, while gold has been valuable for hundred of years. With such a brief diary, it’s tough to inform whether Bitcoin will have an equivalent endurance as gold.

In addition, while gold is widely accepted as an inflation hedge, many of us are still skeptical about Bitcoin generally. Not everyone believes in its potential, and it’s still a speculative investment as at now. If the overall public is unwilling to simply accept Bitcoin (or cryptocurrency in general), it likely won’t survive over the future.

Bitcoin is additionally extremely volatile, which could affect its potential as an inflation hedge. There are many factors besides inflation which will impact the worth of Bitcoin, and there could also be several forces at play when it involves to its recent increase.

In short, nobody knows for certain how Bitcoin will perform as an inflation hedge over time. While it does seem promising immediately, only time will tell whether it continues performing well in the long run.

Several analysts believe that Bitcoin BTC/USD will eventually overthrow gold. Anthony Scaramucci of SkyBridge Capital, for example, posits that while gold has a 5,500-year history as a store of value, the increasing acquisition of crypto technologies leaves gold with a very slim chance to compete in the long run.

The fate of Gold was compared to what befell DVDs upon the arrival of Netflix and live streaming. The arrival of Bitcoin brought in a new world era. Analysts increasingly hold the view that the technical properties related to with BTC are infinitely better than gold.

It is safer to maneuver Bitcoin from one person to a different person due to its virtual properties. Further, the ledger technology behind the invention is near impossible to hack. The scarcity of BTC –at 21 million coins- guarantees its upward trajectory in terms of usefulness. Such scarcity and associated technical properties would ultimately see BTC overtake gold.

Experts in the crypto industry predict that BTC’s value will continue on its present exponential growth path. While BTC’s market cap of $1.178 trillion is a fraction (one-tenth) of gold’s $11 trillion, experts foresee a future in which BTC will prevail. Some go as far as comparing the long term of gold to the fate of rotary phones upon the arrival of smartphones. Scaramucci, however, thinks that gold isn’t entirely doomed; instead, its performance will just stagnate to a flat line. In his view, it’s going to also go up slightly while BTC and other cryptos like Ethereum (ETH/USD) register exponential growth due to the scalability and quality they provide.

Considering all the above scenarios, one can reasonably conclude that Cryptocurrencies will out-perform gold, it is only a matter of time and that Bitcoin in particular will perform as very smart hedge against inflation.

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