By David Khalif, Head of Operations at Viridi Funds
Everywhere you go, prices continue to rise, from gas to groceries, to housing and more. After a record breaking 6.2% year-over-year rise in prices for the Consumer Price Index in October, households may begin asking themselves how they can protect their hard-earned money against inflation. The Federal Reserve's recent comments highlight that “risk of higher inflation has increased” and it’s no surprise that people are looking for places to invest their money. Since the start of 2020, and at the time of this writing, Bitcoin has appreciated in value by over 700% and has acted as an effective hedge against federal government money printing.
Let’s explore some of the qualities that Bitcoin offers and why it might the solution to inflation concerns:
1. A fixed supply of Bitcoin means no more money printing devaluing your dollar
Bitcoin has a defined supply of 21 million and there cannot be inflation to this value. The importance of having a stable supply cap ensures that all people who own Bitcoin understand their overall ownership of the currency. If you are worried about not being able to purchase a full Bitcoin, the cryptocurrency is divisible by 1 million and it is quite easy to purchase a fractional amount of Bitcoin. Historically, the federal government has offered bailouts and increased the number of U.S. dollars during emergencies which has severely increased the overall money supply. This lowers the value of each dollar and is the cause of much of our inflation. However, Bitcoin cannot suffer from additional money printing as the supply is capped and over a long period of time this restriction will ensure that those who own Bitcoin don’t have a diminishing ownership of the protocol.
2. Technology and development continues to grow on Bitcoin
The early iteration of the Apple App Store was significantly worse than the modern day version. The answer is simply due to the amount of time and resources that developers spent building out projects on a given platform. As a result, today the Apple App Store is widely used and the source of millions of user applications. Bitcoin is following a similar trajectory with more development occurring everyday and an increased number of users who interact with the protocol. The trend of having Bitcoin continuously grow is not stopping, and we have seen major developments such as Twitter allowing you to tip content creators with Bitcoin. Commodities, such as gold, may also be used as an inflation hedge, but the possibilities for Bitcoin to be utilized in technology continue to grow every day and offer it a clear path for growth.
3. Institutional growth of the asset class
Bitcoin set many records in 2021, including the first time the asset class has hit $1 trillion in value. As institutions, pension funds, endowments, and corporate balance sheets begin to consider this asset class for an allocation, the demand on Bitcoin will continue to increase. If companies transition a percentage of their gold holdings into Bitcoin as an inflation hedge, we would see significant increases in Bitcoin demand. Couple this increased demand with the fixed supply and naturally Bitcoin will have price increases. We have also seen governments, like El Salvador, purchasing Bitcoin with their treasury, which only adds to the increasing demand we expect to see in the coming years.
Despite the excellent tailwinds for this asset, it is important to note that Bitcoin has extreme volatility and may fall a significant amount. Although we have seen many crashes in Bitcoin price, it is important to call out that no person since the inception of Bitcoin would have ever lost money on their investment if they held for at least 4 years.
David Khalif is the Head of Operations at Viridi Funds, a registered investment advisor providing crypto-related investment products. The Viridi Cleaner Energy Crypto-Mining & Semiconductor ETF (“RIGZ”), is the first actively-managed ETF that invests solely in the crypto mining vertical consisting of companies that utilize energy sources to secure the bitcoin network. RIGZ uses proprietary valuation metrics to identify mining companies that are believed to have a strong prospect for growth, in addition to utilizing clean energy sources, in a tax-efficient manner. Follow him on twitter @DavidKhalif.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.