With actual inflation having risen by 11.8% since April 2020, investors are increasingly seeking a liquid inflation hedge. By definition, this must be an asset somewhat detached from the financial system. Inflation-linked bonds are one solution, but if their liabilities exploded as a result of excessive inflation, they would be first in line for default.
Gold is one traditional answer. Many investors think it has failed to protect them during the recent burst of inflation. But the reduction of the fair value was offset by a low price to begin with – despite a painful move in real rates (to which gold moves inversely and there is a visible negative correlation) gold has been saved, because it was under-priced at the beginning of the year. Gold is in fact as rational an asset as you could hope for, and protects you from actual inflation – a considerable tailwind for its price.
Bitcoin on the other hand, is a growing alternative asset. I have never before been so confident in saying that bitcoin will become ever more relevant for mainstream investors and will continue to grow for years to come. For the first time in history, bitcoin enables computers to exchange value and set off a chain reaction by inspiring the crypto space. The more people that engage with bitcoin, the more the network grows. This network growth lies at the heart of value creation in the space. Millions are now using it around the world, not just speculating it. According to a report by Chainalysis, the most active countries were Vietnam, India, Pakistan, Ukraine and Kenya. In 2022, the robust bitcoin network has remained stable despite the crash in price, and only had a temporary collapse (and quick recovery) last year due to Chinese regulations.
Bitcoin + Gold = BOLD
What Gold and Bitcoin have in common is that they are both hard assets, and that has an appeal during times during the market cycle. I don’t see them as currencies – they are alternative assets, both of which behave like commodities. Gold tends to see a premium building during risk-off conditions, and bitcoin during a risk-on.
That’s why we launched the Vinter ByteTree BOLD Index (“BOLD1”) this year, which brings together these remarkable assets on a risk weighted basis. This means that each month, the index allocates an equal amount of risk to each asset.
The best inflation hedge of all
BOLD1 has been the closest thing I have ever seen that resembles an inflation hedge. It has remained significantly less volatile than equities. Having a bubble at the same time has been a major problem for bonds and equities this year – they are supposed to be different, but not when the central banks print money like they have just done. The beauty of the bitcoin and gold combination is that it is hard to imagine them experiencing a bubble at the same time.
Bitcoin and Gold are the two most liquid alternative assets in the world. They are not in competition, play different roles, have global cross-border and cultural appeal, and come together as an all-weather liquid inflation hedge.