Bitcoin: in a world of plenty, scarcity is king (guest post)
During inflationary times it’s important to own assets that maintain their purchasing power.
Many economists define inflation as a rise in prices due to an increased demand for goods and services.
I do not agree with that definition; I define inflation as an increase in the currency supply.
Over the past few years, global supply of fiat currencies has increased dramatically, and we are now entering a period where we will see a continued increase in supply (as a reaction to the economic malaise caused by the pandemic).
I therefore believe we are likely to see reduced purchasing power as the number of fiat currency units is increasing.
In other words, people’s money will be worth less because the central banks are printing so much of it.
The Alternatives to Fiat
In such a situation gold and silver become the go-to assets. Given these precious metals’ limited supply and durability, they have been stores of value for over 5,000 years.
Source: BMG Group
But a new player has entered the fray: Bitcoin.
It is becoming increasingly clear why Bitcoin is an attractive store-of-value asset. We are living through a digital revolution and Bitcoin has in some sense become “digital gold”.
The role Bitcoin plays with its $210 billion market capitalisation is small, however that might be about to change.
Fidelity, the American asset manager with $8.3 trillion in assets under administration, recently announced that they would set up a Bitcoin fund.
That is big news.
Combining the Old With the New
Fidelity is an old and respectable investment company, and the fact that they are setting up a Bitcoin fund brings a lot of legitimacy to the cryptocurrency.
It also brings new demand - if, for example, 0.5% of Fidelity assets are diverted to Bitcoin, it will channel $40 billion into the cryptocurrency, which is 20% of Bitcoin’s market capitalisation today.
My belief is that when inflation begins to rise, savings will flee fiat currencies and seek protection in scarce hard assets.
Older generations will prefer gold, whilst younger generations will embrace digital technology and Bitcoin, but both groups will save in scarce assets because they will have realised that fiat currency in abundance is not a viable proposition.
The lessons of inflation, debasement and loss of purchasing power will be learned yet again.
All the best,
Lars M Haugen