In November of 2020, Uncommon Cents published an article with the title - “The Case for Bitcoin: Why Every Investor Should Own Bitcoin in their portfolio”. In it, we argued for why Bitcoin is a hedge against inflation and provided a framework of Bitcoin as digital gold. At the time, Bitcoin was trading around a price of ~$17,000.
Just 10 days after that article was posted, Microstrategy took its first step in what became an extremely bold bet of slowly converting their balance sheet into Bitcoin. Other large public companies such as Tesla and Square followed as well, albeit at a smaller scale.
Bitcoin has also found a home in the holdings of famous investors such as Bill Miller, Stanley Druckenmiller, Paul Tudor Jones, Peter Thiel, and Guy Spier. Even former skeptics such as Kevin O’Leary and Ray Dalio have changed their minds about this asset.
Bitcoin’s penetration has not just been limited to the financial world either. It has now stepped into popular culture with athletes such as Aaron Rogers, Odell Beckham Jr., and Klay Thompson taking a piece of their salary in BTC. Musicians such as Snoop Dogg, Kanye West, Sia, and Mariah Carey have also expressed their support for Bitcoin and have hinted that they own it to some degree.
The 2022 Super Bowl was a perfect example of this phenomenon, with 4 cryptocurrency brokerages running their advertisements during the most-watched sporting event in the United States. Coinbase even became the second most popular app on the Apple App Store following their unusual ad featuring a moving QR code.
If that wasn’t enough, politicians such as Miami mayor Francis Suarez and NYC mayor Eric Adams are now getting involved in this digital currency. Bitcoin has now become a holding of many U.S Senators. The most impressive accomplishment of Bitcoin in the political sphere though has been its adoption as legal tender in El Salvador.
Not surprisingly, the price of Bitcoin has also exploded during this time. At the time of writing, Bitcoin price is hovering around the $40,000 mark, having reached an all-time high of ~$68,000 in November of 2021. More interesting than the price itself is understanding how the narrative of Bitcoin has evolved.
Since inception to up until recently, the narrative of Bitcoin was that it was a hedge against stock market performance. The idea was that during severe equity downturns, Bitcoin would act as a form of safe haven protection for investors - much like gold in the previous decades.
This theory was quickly debunked in 2020, as the correlation between Bitcoin and S&P 500 performance hit an all time high during the COVID related volatility. Turns out Bitcoin wasn’t actually such a great hedge against the market.
The narrative then shifted to Bitcoin being a hedge against inflation. Given the Fed policy, devaluation of the dollar seemed to be inevitable. Over the past year, however, data has shown that Bitcoin may not be such a great inflation hedge either. The price of Bitcoin has actually faltered in the face of ever-increasing CPI numbers.
So where exactly does Bitcoin sit now? What is the narrative behind it?
In our view, Bitcoin continues to be a hedge against long-term inflation and devaluation of the currency. While the CPI numbers may not be a great correlation, the 5 year inflation expectation rate and Bitcoin has been almost perfectly correlated with each other over the course of the past one year.
In fact, since inception, the price of Bitcoin has been inversely correlated with the purchasing power of the dollar. So, while we recognize the near term headwinds for the price of Bitcoin, we believe that Central Bank money-printing and currency devaluation is a multi decade trend that will not subside any time soon.
Given this, we believe that it still makes sense for investors to allocate some of their portfolio in Bitcoin. If nothing else, consider it as your insurance policy against the policy errors of Central Banks across the world.
As Ben Carlson put it on the Animal Spirits - “The Fed is only raising rates now to cut rates in the future”.