Jason Guthrie is the Head of Capital Markets in Europe at the international investment giant WisdomTree.
The current economic climate is a concern for investors. Trade-restructuring, high levels of liquidity, systemically-low inflation, inverted yield curves, negative-yielding bonds, historically tight employment markets, and significant leverage at both consumer and government levels are just some of the factors that suggest we are in a world where monetary and fiscal policies could tenably be argued by those at opposite ends of the spectrum, and as a result, many people are questioning the effectiveness of modern-day monetary systems.
At the same time, there is a clear lack of trust in central banks. Consider the U.S. Federal Reserve, for example. While the Federal Reserve is meant to be an independent central bank, it has its governors appointed by the President of the United States, and it also frequently engages with the Treasury, meaning that, in all practicality, it works with the government. This raises questions over conflicts of interest and market manipulation. There is no fail-safe mechanism to prevent the Treasury from creating cheap financing for the U.S. government by issuing more debt while the Federal Reserve reduces interest rates. Meanwhile, in other G20 countries, central banks have become buyers of all kinds of debt, severely inflating their balance sheets without true accountability.
Given this backdrop, it is unsurprising that Bitcoin and Blockchain – the digital ledger technology on which all transactions are recorded – has gained credence over the last decade. It is the lack of trust in the current financial system, and the subsequent demand for a more robust monetary system that is boosting the appeal of the cryptocurrency. Given that Bitcoin’s inherent structure is designed to address the shortcomings of traditional currency management, many see it as a genuine alternative to ‘money’ as we know it. Here, we look at why now could be a good time for investors to consider exposure to Bitcoin within their portfolios.
Bitcoin: an alternative to traditional monetary systems
Bitcoin solves many of the problems associated with today’s monetary systems. For a start, it is not a sovereign institution-designed financial instrument that could serve any ulterior motive; it has been created as an alternative to traditional payment networks, by the public, and it is a declaration of the democratic determination of value as its very existence undergoes a continuous vote-of-confidence. Moreover, there is full visibility – the blockchain attribute allows for immutable accounting and ensures that no provisions of the manifesto are violated.
Additionally, with Bitcoin, we do not need to be concerned about oversupply, as supply of the asset is capped. And supply up until a terminal point is self-regulating; if network economics prohibit the creation of new units at the same pace, then the supply schedule naturally slows.
Comparing Bitcoin to fiat currencies like Sterling or U.S. Dollars and gold, the cryptocurrency ranks well in terms of its ability to be exchanged and stored, while retaining its independent qualities. In a post-Bretton Woods world, where central bank policy has been marred by suspicion, a trust-less solution is making its own case. So, why is it important to consider Bitcoin as an investment now?
To answer this question, consider Bitcoin’s core traits:
- Non-governmental, decentralized ownership
- Full transparency, auditability, and immutability
- Requires resources to create and process
- Rewards creators and processors
- 10+ years of existence and technological efficacy
- Capable of making peer-to-peer cryptographically secure payments
Apply the filter of the current global economic backdrop and it becomes clear that Bitcoin fully deserves a spot in the global macro toolkit. Yet with only 21 million Bitcoins ever created – a third of which are believed to be permanently lost – and a scaling back of production planned for the near future, it is not inconceivable that we will see a supply shock issue in the near term, just as institutions are gearing up their interest. As such, we believe that any forward-thinking investor should become familiar with Bitcoin, assess the potential and risks associated with this young but promising asset class, and consider an allocation to the asset, however small, within their portfolios.
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The uncertainty and excesses within the global financial system today, paired with a demand for financial prudence and egalitarianism, mean that there are numerous tailwinds that will serve to channel capital, at least at the margin, away from traditional investment options to the benefit of Bitcoin. For this reason, now may be the time for opportunistic investors to seize the Bitcoin opportunity.