Bitcoin comes of age as a new inflation hedge

Bitcoin has been embraced by institutional investors this year

(Image credit: © Getty Images/iStockphoto)

published 23 December 2020

“A fraud, a rip-off, a sucker’s bet.” But for all the invective heaped upon it, bitcoin continues to soar, says Edward Robinson on Bloomberg. The cryptocurrency eclipsed $20,000 last week and then charged on, briefly hitting $24,000. Bitcoin has risen by 370% since mid-March.

But this is still a highly volatile asset that can plunge by 10% at the drop of the hat. Investors who bought in at the height of the last boom in 2017 found themselves enduring a long bear market. Bitcoin isn’t even this year’s best-performing digital currency: its 184% gain is overshadowed by the near 360% rise of Ether, another cryptocurrency, notes Paul Vigna in The Wall Street Journal.

The big difference from 2017 is that professional investors are now jumping on board. British investment manager Ruffer recently disclosed that it “was holding about $744m of bitcoin”. The currency is increasingly regarded as a mainstream asset class and source of diversification, says Izabella Kaminska in the Financial Times. This year “bitcoin went institutional”. Perhaps the best argument in the currency’s favour is that it is “still standing”: after 12 years of scrutiny, hacks and speculative frenzy, bitcoin is resilient, “if not flourishing”.

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Its potential as an inflation hedge has long been part of its appeal, says Noelle Acheson on coindesk.com. Only 21 million bitcoins will ever be created. It is also increasingly regarded as protection against all the ills that can accompany an inflationary disaster: authoritarian governments and social instability. Bitcoin might seem weird, but then conventional politics and economics is also getting weird – witness the rising popularity of “modern monetary theory” (MMT). “More than a hedge against inflation,” its fans hope bitcoin is “a hedge against ‘crazy’.”

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.