The finance industry has been divided on the bitcoin question since its inception.
On the one hand, bitcoin enthusiasts believe that the digital currency is a good investment asset. On the other hand, bitcoin skeptics believe that bitcoin does not have any underlying value and is merely a speculative asset.
However, recent data and events have been leading some bitcoin skeptics to change their minds, with some now attesting that there are good reasons why people should invest in bitcoin.
Ray Dalio, the founder of Bridgewater Associates, was one of those early skeptics who trumpeted that bitcoin was heading for a certain doom. Mark Cuban, the famed US billionaire entrepreneur, also believed it was more of a religion rather than a true solution to a problem.
Now, both Ray and Mark have investments in bitcoin.
So what is changing the minds of these all-star investors?
Bitcoin as a store of value
An asset is a store of value if you can keep it for a long period without it losing value.
When an asset is a store of value, it becomes a good investment. Why is this? The whole purpose of investing is to earn compound interest such that after a period, the money is worth more than when you started the investment.
The only way that can happen is if the asset acts as a store of value.
Today, many financial analysts and investment experts consider bitcoin as a store of value. To understand why, let’s briefly consider one of the problems with fiat currency.
Governments can increase or decrease the money supply in an economy to achieve various fiscal and monetary policies. When they do the former — increase the money supply — the value of money decreases.
The nominal value of money may remain the same, but its real value (what it can buy) will be reduced. What $1,000 could buy before the increase in money supply could now require $1,200, for example. This is because the currency has depreciated in value through government fiscal policy — that is, the printing of more money.
Bitcoin escapes this problem because it has a fixed supply. The inventor(s) of bitcoin fixed its supply to 21 million BTC. No central government can decrease or increase that supply at will.
Therefore, bitcoin can sustain its value, and even grow it (depending on demand), over a long period because there is no government interference to increase supply and reduce real value.
Bitcoin as a diversification tool
Many finance experts now consider bitcoin to be the “digital gold.” Traditionally, investors have used gold to diversify their investments in the stock and bond market because of its near-zero correlation to both markets.
When an asset has zero correlation to another asset, it means when the latter falls in value, that fall does not extend to the former.
Bitcoin has so far shown the same near-zero correlation that makes gold such a desired diversification tool. From 2012-2020, bitcoin had a 0.01 correlation with the stock market and 0.02 with the bond market. Not even gold was able to match it (gold had 0.02 correlation with the stock market and 0.28 correlation with the bond market).
This ability of bitcoin to approach zero correlation with the stock and bond market has thus made it viable for the diversification of investment portfolios.
Bitcoin as a hedge against inflation
Another feature of gold is that it provides a hedge to investors in inflationary periods. Gold is very difficult to mine so increasing its supply is difficult. Therefore, when fiat currency is losing its value due to excessive money supply, gold is stable.
Bitcoin is also gold-like in this manner because its supply is fixed.
In fact, while gold can be mined at any time (though difficult), bitcoin has a fixed supply. Therefore, if gold maintains its value in an inflationary period, providing a hedge, bitcoin is expected to do the same.
While we have not had a significant inflationary period since bitcoin became mainstream (making it difficult to prove bitcoin’s potential as an inflation-hedge), finance experts expect that this benefit will hold.
Why invest in Bitcoin?
Because of its capacity as a store of value, diversification tool, and a hedge against inflation, many early bitcoin skeptics are changing their minds and embracing it as an investment asset with underlying value beyond market speculation.
If you want a store of value that can help diversify your investments in bonds and stocks and protect you during inflation, you should consider bitcoin.
Sarwa, a digital financial advisor, now allows investors to include bitcoin as part of a personal investment portfolio. With Sarwa, you will be able to build a customised and diversified portfolio of stocks, bonds, REITs, and bitcoin that best fits your unique profile, allowing you to minimise risk for your elected level of returns.