Bitcoin has had the financial world buzzing for years, and it’s not going away anytime soon. Bitcoin has been increasingly gaining acceptance by some of the globe’s most scrutinizing financial players, like institutional investors. Cryptocurrency has been noted primarily for its parallels with traditional safe-haven assets like gold. Long used as inflationary protection, gold began losing its luster when it no longer backed the U.S. dollar. Today, cryptocurrency presents an opportunity to garner the inflation protection benefits of gold without many of its drawbacks and risks.
Democratic Access Gives Every Investor an Opportunity
Accessing traditional markets is challenging enough, be it through workplace investment accounts or individual brokers. Oftentimes, there are minimum account balances, monthly account fees, or simply too many decisions to make among options. With Bitcoin, investors do have several options for purchasing it and doing so no matter your budget.
As a digital currency, transactions take place online through either cryptocurrency exchanges or through a brokerage account. If you go the cryptocurrency exchange route, you can buy Bitcoin directly. For investors new to cryptocurrency, there are ways to expand your portfolio with a lower barrier to entry: Bitcoin ETFs. “These ETFs give you exposure to Bitcoin without having to hold the cryptocurrency in self-custody directly,” shares Nic Puckrin, co-founder and CEO of educational platform Coin Bureau.
Here, investors have several ways to get into the crypto market, and at multiple price points. By reducing barriers to entering the crypto market, it’s reasonable to expect that demand will remain high. Some investors prefer to hold gold assets in tangible form, but this preference adds unnecessary risk. Investors collecting gold bars need to take precautions to protect their hedge against inflation with safe or secure storage. Long-term, this can present a logistical nightmare. Conversely, cryptocurrency’s digital status makes it portable, transferable, and accessible across the globe.
Limited Supply Keeps Demand High
Gold has long been beloved for its beauty, but its usefulness is the key to establishing its value. Long before paper money or its digitized counterpart entered our economic system, gold was traded for goods and services. As a scarce resource, it was and continues to be in high demand, even as a non-interest-earning asset. However, when the U.S. Dollar ceased to be backed by gold in 1971, its stronghold on determining value ended.
When the Gold Standard ended, money’s value became market-driven, with lending rates and consumer confidence providing market influence. Monetary policy attempts to shift consumer behavior, which in turn causes inflation to spike, dip, and dig away lifetime savings. Economies turn to printing money when things get tough, which helps in the short term, but it drives values down.
With Bitcoin, there are only 21 million tokens available in the marketplace, making it an excellent store of value. Creating more is impossible, meaning runaway inflation can’t happen, and Bitcoin can hold its value despite market activity. Early investors have likely made the biggest return on their investment, but Bitcoin’s historical returns demonstrate potential future earnings. Plus, its ease of transfer globally decreases the friction of trading during market opening or selling physical assets.
Diversification Provides Additional Portfolio Risk Management
Placing all of your assets into one investment class infuses unnecessary risk into your portfolio. Savvy investors establish a risk-adjusted, diverse portfolio that aligns with their unique goals and drawdown timeline. Crucial to establishing a diverse portfolio is balancing the portion of return-generating assets and store of value assets. Bitcoin adds another asset class for investors to incorporate into their portfolios as a hedge against inflation and market volatility.
While investing solely in cryptocurrency isn’t advisable, diversifying your portfolio to have exposure to another asset class is wise. Since it behaves differently than gold, it can counterbalance other asset class drawdowns. Market demand for gold can decrease, especially in slower economic times. If the demand for golds’ usability as a precious metal decreases, so does its value. Digital currency does not have a physical asset and its value is driven by demand and market confidence.
Decentralization Offers Unique Protections
Bitcoin can be seen as the opposite of gold, mainly as a digital asset versus a physical one. Because of this difference, it can behave differently than traditional assets, especially when inflation rises. History tells us that inflation will continue to rise and as a political pawn, it’s nearly a given. The alternative to inflation is a recession, which the government will do anything to avoid. Instead, the Fed will ramp up interest rates to slow spending and blame inflation and consumer debt on private industry.
With Bitcoin in your portfolio, its value operates outside of federal monetary policy. Cryptocurrency protocols, security, and low-cost transactions ensure smooth transactions by avoiding political manipulation. Bitcoin operates on a decentralized blockchain network that exists outside of traditional currency. Without the risk of government influence and traditional banking systems, it’s less susceptible to political motivations or corruption.
Protect Your Portfolio with Diversification Through Cryptocurrency
Cryptocurrency is still a relatively young currency, and its future, like all other investments, is yet to be known. However, as the global political landscape shifts and technology advances, it’s deserving of being an asset in your portfolio. Like all investments, investing in Bitcoin carries risks, and all investors should conduct due diligence before investing. Learn more about cryptocurrency, stay on top of trends in the marketplace, and become an informed investor. When you do, you can make the best decision when developing an inflation-resistant portfolio with cryptocurrency.
