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Preparing for the Great Inflation - the facts behind the Bitcoin ‘safe haven’ narrative

Preparing for the Great Inflation - the facts behind the Bitcoin ‘safe haven’ narrative

In July of 2019, legendary hedge fund manager Ray Dalio published an article titled Paradigm Shifts”. In the article, he mentions how every 10 years or so, markets change due to new paradigms. Identifying and adjusting to these paradigms, Dalio states, is crucial to one’s success as an investor.

When the article was published, Dalio stated that change was on the horizon yet again, after the low interest rates and central bank quantitative easing that followed the 2008 Great Financial Crisis created a reflationary environment, which led to dizzying rallies in the equity and property markets.

Dalio believes that escalating global conflicts, negative interest rates, and central bank-driven currency depreciation were driving another paradigm shift, which would see the previous paradigm’s hot investments like stocks and property lose some of their value.

Dalio stated that the kinds of assets that will excel are those that do well when money is losing its value due to central bank money printing and when both domestic and international conflicts are significant. In the article, he named gold as one such asset.

But did Mr. Dalio miss something in an otherwise excellent essay?


    Gold is No Longer the Only Game in Town: Enter Bitcoin


    While Dalio didn’t explicitly mention Bitcoin in his piece, BTC, with its predetermined fixed supply and ever-decreasing monetary issuance, fits the bill for something that would be nice to have when central banks are continuously devaluing their currencies in the current system.

    There is speculation that Ethereum could also become a popular safe haven asset, following the Ethereum London Hard Fork, which will see gas fees burned after use.

    Though Bitcoin’s scarcity has been known since the beginning of its existence, recently, Bitcoin has increased in popularity due to the combination of the 2020 halving and central banks printing trillions of dollars overnight in an attempt to counter the economic effects of the Coronavirus pandemic.

    Bitcoin’s scarcity, as measured by Stock to Flow, can now be compared to that of gold. This and inflationary fears stoked by trillions of dollars of new money and production cuts due to COVID-19 impacting global commerce, has more people looking at BTC as an alternative inflation hedge.

    While BTC’s inflation hedge narrative has circulated among Bitcoiners for quite some time, the world experienced quite a shock when a famous billionaire hedge fund manager, Paul Tudor Jones, came out and said that he was buying Bitcoin as a hedge against central bank money printing-induced inflation.

    Mr. Jones isn’t the only big financier interested in Bitcoin’s inflation-resistant properties. Fidelity, a huge financial services corporation with trillions of dollars of assets under management, published a survey that reported 7 in 10 of all institutional investors either hold or expect to be holding digital assets within the next five years.  

    Bitcoin has also proved its worth during times of conflict. Its price surged 87% in less than 2 weeks during the 2012-2013 Cypriot financial crisis, where the government of Cyprus took money from people’s bank accounts to bail out investment banks who made bad decisions.

    Bitcoin then provided a similar safe haven for nationals of Venezuela and Argentina, who were hit with high levels of national inflation and strict monetary policy.

    These days, it’s becoming increasingly normal for everyday citizens and billionaires alike to take Bitcoin seriously in an uncertain world.


    Quantitative Easing Policies Didn’t Lead to Inflation: Why the Worry Now?


    In the wake of the 2008 Financial Crisis (and the low interest, money printing policies that followed), many feared a massive increase in inflation. This led to gold having an epic rally, as investors sought out the precious metal as an inflation hedge.

    However, gold prices eventually stabilized, along with the official accounts of the inflation rate, which were accepted despite the continuing increase in the cost of things like house prices.

    This time around, things might be different. Last week, the Federal Open Market Committee (FOMC) made the decision to leave interest rates unchanged at almost 0%. The thought process seems to be that the stock market is recovering, therefore no measures (for eg. higher interest rates or tapering) need to be prepared for the prospect of high inflation.

    However, since 2009, we’ve seen a growing trend in asset prices (e.g. US stock market prices breaking all-time highs while tens of millions of US citizens are unemployed), and we’re also seeing inflation seep over into everyday consumer staples.

    For example, meat prices in the US are surging, as are other grocery prices.

    Though these increases may have resulted from the workplace absence following the COVID-19 pandemic, there’s no guarantee as to when these supply chain disruptions will go away.

    Many businesses are struggling to stay afloat without government aid - much of which financed via money printing - since consumers aren’t going to places like movie theaters or restaurants in the numbers that they used to.

    Less supply and reduced services combined with more demand in the form of massive quantities of new money are indeed a recipe for inflation.

    Regardless of whether or not high inflation hits, the fear of it is here, as it was in 2008. And traditionally, inflation affects the poor much more than the rich, as the rich generally have access to diverse financial vehicles into which to divest their cash savings.

    This time around, democratic access to decentralized cryptocurrencies and the DeFi ecosystem could be a remedy for this inequality.


    Bitcoin’s Future Outlook: Will the Inflation Hedge Narrative Hold?


    That said, will investors flock to gold again, or Bitcoin, or both?

    Though Bitcoin was the best-performing asset of the decade (and perhaps of all time), there’s no guarantee that this will continue or that Bitcoin will indeed serve as a proper inflation hedge thanks to its inherent scarcity.

    Bitcoin performance over 10 years

    After all, gold has fulfilled its role as money for thousands of years, across civilizations the world over. Why reinvent the wheel?

    For one, Bitcoin’s guaranteed and fixed supply, high divisibility, counterfeit resistance, decentralization, and programmability are some notable advantages the digital asset has over gold. Nevertheless, these characteristics don’t guarantee Bitcoin’s staying power unless people see value in them.

    I believe more and more people will come around to Bitcoin, as they have the past few years, with Blockchain wallet users increasing almost sevenfold from early 2017 to 2021.

    As wealth filters down into the younger generations, this mass Exodus from traditional finance is likely to accelerate significantly.

    Of course, this is just my opinion. But looking at the facts, we can see that Bitcoin is becoming more and more like gold in serving as an inflation hedge.

    Bloomberg recently released a report called Bloomberg Crypto Outlook: Bitcoin Maturation Leap that details Bitcoin’s convergence with gold. According to Bloomberg, Bitcoin’s relationship with gold is nearly twice that of stocks.

    A growing number of companies, most famously Tesla, are holding Bitcoin as part of their capital allocation strategies.

    And with an increasing amount of domestic and international conflict, negative interest rates, and currency depreciation, I only see that relationship getting stronger.

    If the lack of action taken in the July 28th FOMC decision is anything to go by, it looks like Bitcoin and the inflation narrative will remain at the centre of our next great paradigm.


    JP Richardson is the co-founder and CEO of Exodus, a Bitcoin wallet that makes securing, managing, and exchanging Bitcoin and other crypto assets easy.

    This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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