The US legislative bodies have approved yet another extensive stimulus package, this time to the tune of US$1.9 trillion — a core electoral promise of the Biden administration — to put the economy back on track after facing the worst economic crisis in decades. This bill, which is one of the largest rescue measures in U.S. history, includes — among tax and unemployment benefits — US$ 1,400 checks to be sent out to millions of low- and middle-income Americans to combat the negative consequences of the pandemic.
Similar to previous rounds of stimulus checks, financial institutions like Deutsche Bank, are expecting that retail investors could pump billions of US-Dollars into the stock and crypto markets, further fueling the equity market rally. On the other hand, though, consumer spending is going to pick up drastically as well. Especially if the first round of stimulus checks is any indicator, then we might once again see similar things happening as in spring 2020. Back then, Yodlee, a leader in data aggregation, found that individuals spent 81% on average more in the week following the deposit of the stimulus check in their bank accounts than in previous weeks.
The combination of yet another round of COVID-19 relief, an easing pandemic and an increase in consumer spending could ultimately put pressure on prices and cause inflation to rise. Even though most economists expect that inflation will remain subdued in the short run, a spike to levels not seen in generations is still on the table in the long run. However, the big worry here is that all this newly printed money by the FED will eventually cause the economy to overheat, leading into an inflation spiral.
Therefore, it’s extremely important for retail investors to invest in assets that keep pace with rising prices. Hence, they should be buying assets that appreciate in value, are tangible or pay interest as an inflation hedge to protect their wealth. For generations, the asset used most often to hedge against inflation is gold. Due to its nature as a tangible asset with limited supply, it often performs extremely well in times of high inflation. Yet in spite of this, another asset has been outperforming gold when it comes to wealth protection — Bitcoin.
This year alone, Bitcoin has increased by nearly 70%, whereas gold is down about 9%. Recent Bitcoin purchases by industry heavyweights like Tesla or MicroStrategy was water on the mills of Bitcoin’s proponents. This can also be seen in the chart above (Figure 1), in which you can see that more money has been funneled into Bitcoin ETFs lately than into Gold ETFs. Also, the old argument that the price volatility of Bitcoin diminishes its appeal against gold — simply does not hold up against recent empirical data.
As empirical data shows, by adding Bitcoin to a diversified portfolio of stocks and bonds (60:40 weighting), Bitcoin contributed positively to a portfolio’s cumulative and risk- adjusted returns in 74% of one-year-periods, and 100% of three-year-periods under different market regimes (https://static.bitwiseinvestments.com/Research/Bitwise-The-Case-For-Bitcoin-In-An-Institutional- Portfolio.pdf).
Counterintuitively, Bitcoin has even positively impacted portfolio returns in times when Bitcoin’s price has declined (assuming quarterly rebalancing). This finding is remarkable in a way that it underpins the fact that Bitcoin has low correlations with other asset classes, allowing investors to capitalize on the volatility harvesting opportunity that non correlated assets offer.
To sum this all up, due to the FED’s relentless money printing policies, people are increasingly being reminded of the negative eras of high inflation — a situation they may have previously only believed would exist in economies like Venezuela or Zimbabwe. Therefore, it’s only natural that people are looking to protect their hard-earned savings from inflation. Gold used to be the proven means for this, but Bitcoin is proving to be the new go-to asset used even by institutions, to hedge against inflation fears.
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