This is an op-ed by Adam Taha, an entrepreneur with two decades of experience in government and corporate finance.
The latest printout of the consumer price index (CPI) came out at a shocking 9.1% (9.8% in cities), and many speculators expected the bitcoin price to “go up”. What happened was the opposite and bitcoin price action was correlated with other risky assets. Many threw an expected tantrum and asked why? “I thought BTC was an inflation hedge…when the moon?”
Keep in mind that bitcoin is a 13 year old resilient asset with only 13 years of network effect. How resilient is it? While the dollar, as we all know, has continued its meteoric rise, posting new yearly highs against the British pound, euro and Japanese yen year to date, making it a wrecking ball against most foreign currencies and risky assets. However, over the past week, something incredible has started to happen: the price of bitcoin (in USD) has maintained an extremely high level of support as the dollar gained. This means an extremely important event in my opinion.
Bitcoin’s price action is frustrating some retail investors. This is because the market is not retail dominated. It is dominated by institutional investors and “big capital”. Institutions dominate the market but are themselves bogged down by rules, regulations and policies. As such, they view bitcoin as a risky asset and when inflation is at its highest (last print 9.1%) then they take the risk, especially when interest rates are high ( “quantitative tightening” (QT) environment). Generally, “cash is king” is a common statement in traditional finance and the current fiat system for many investors. Institutions sell their risk-off assets and they buy cash (USD) and cash flow stocks when the DXY rises.
Note that gold and silver have fallen considerably in recent weeks. So what happened to their safe store of value proposition? Nothing. The proposition itself is probably still valid. It’s not about the assets themselves, it’s about accumulating dollars right now. Having cash is better for institutions and investors than having a valuable but illiquid asset. Remember that institutions consider cash king in times of high inflation and QT.
As a reminder, Bitcoin is only 13 years old and it takes time for retailers and institutions to understand the true value of bitcoin. For now, institutional investors continue to view cash as king, and many people in retail still don’t understand what bitcoin is. So for now, we are still stuck in the monetary world of the Federal Reserve.
Fed policy is unsustainable. They know it, we know it. They cannot and do not want to stop printing by adding a liability to their balance sheet (debt to be repaid by future generations). What is the solution? Bitcoin is the solution. Of course, in two months, cash will remain king, but in two years, cash will return to its original form: the trash can. Meanwhile, bitcoin will continue to do its job and investors (retail and institutional) will realize its value.
The following statement is relative: “Bitcoin is a hedge against inflation”. I say relative because for someone who bought bitcoin years ago (before 2017), this statement is true. But for someone who has purchased recently, this statement is taken with some skepticism. In the long run, it’s definitely a hedge against inflation.
A credit default swap or CDS is an insurance instrument that institutions use when they hold a bond issued by an issuer such as a corporate or government bond. They can take out insurance against the default of this obligation (default of the issuer). For institutions and investors, Bitcoin can and should be their CDS in the event of a Fed default. Bitcoin protects your wealth from debasement and it protects you like a CDS on the government. Bitcoin is your insurance policy against all government monetary policy and its “scam token” (aka the dollar).
The future is almost completely digitized. Money will be no different. Bitcoin is undoubtedly the only solution for a digital currency that is sound, immutable, secure and gives people their sovereignty. Banks are counterparties. Goldman Sachs, NYSE, Vanguard, Fidelity and others are counterparties. With bitcoin, you own the asset, not the underlying asset. In the current system, the trust or hope rests on the counterparty to meet their part of the obligation and give you what is due to you when you need to liquidate an asset. Bitcoin turns this around using an elegant system of incentives, encryption, supply caps, decentralization, and a network that anyone can participate in.
Increasing your purchasing power comes second. First, you need to protect that purchasing power. How to protect your purchasing power? Bitcoin.
This is a guest post by Adam Taha. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.