What Advisors Should Know About Bitcoin and Inflation
When it comes to something as complex as the economy, how do we as humans think we can manage everything so neatly? Dot plots, forward expectations, tapering and rate changes – when a group of people, like those at the U.S. Federal Reserve, is trying to guide the economy, the result is often mistake after mistake. The truth is that no one knows for certain, and everyone is making a guess about the future.
In the U.S., for instance, the creation of new money, as measured by the Fed’s M2, has gone from 5% annualized in the early 2000s to 18% annualized since 2020. The impact has been the highest inflation we’ve seen since the early 1980s.
This article originally appeared in Crypto for Advisors, CoinDesk’s weekly newsletter defining crypto, digital assets and the future of finance. Sign up here to receive it every Thursday.
Home prices have surged, increasing 19.3% in the 12 months ended Nov. 30, according to Zillow. (That comes after a record-setting 2020, with the highest price increase since 2005.) Car prices were up 13.2% in 2021, and inventory levels are hovering at all-time lows. Beef, pork and chicken prices rose roughly 26%, 19% and 15%, respectively, in 2021. So regardless of where you look and what you consume, life is getting more expensive.
But what if there was a better way to know with precision and confidence the future supply of money, and it could not be changed? Individuals and businesses could better make projections for the future and plan, because price signals in the economy wouldn’t be distorted. This is where bitcoin enters the picture.
In previous articles for this newsletter, I’ve written about bitcoin as a savings tool using a dollar-cost averaging strategy and the ways bitcoin can play a role in a portfolio. Here, I’ll detail how bitcoin can be a store of value that avoids the negative effect inflation has on fiat money like the U.S. dollar.
Why bitcoin’s fixed supply is beneficial
Bitcoin is in a class of its own in the broader cryptocurrency ecosystem. Ninety percent of all the bitcoin ever to exist has been mined. Ninety-five percent is expected to be mined by March/April 2026, and the entire amount – the maximum of 21 million bitcoins – by February 2140. When math and code are at the core of a monetary system and not people, it allows for better confidence for the future and the long-term implications. Math and code are not influenced by a political party, agendas or other factors. The rules are the rules, executed day in and day out.
The current inflation of the Bitcoin network is 1.77%, and it is dropping. A person can know that if they buy bitcoin, they’ll store wealth into the future with certainty, as there’s no way for anyone to devalue or create a new bitcoin. The reason why is the incentive structure that has been built around for miners, holders of bitcoin and the network itself. Bitcoin, with its 21 million coin supply cap, has the benefits of trust in a fixed-rule system that can be upgraded but remains foundationally unadjusted.
Bitcoin and purchasing power
The goal of money is to allow for economic output to be saved for future consumption. Holding cash today in the inflationary environment for a client is a guaranteed recipe to lose purchasing power – while the exact opposite has been true over the years for bitcoin. Money needs to have demand for it to have value. According to a recent report from Grayscale, 25% of investors with $10,000 or more in investable assets own bitcoin. (Editor’s note: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.) The demand for bitcoin is increasing, according to Glassnode, as are on-chain analytics as more and more entities begin to own bitcoin.
So, in a world with convoluted and confusing financial markets, a base monetary system as transparent and open as the Bitcoin network is a game-changer. In my view, those adopters who move wealth to bitcoin today will be rewarded. They’ll be able to secure the value they created today into the future, allowing their consumption to remain consistent or grow. Those who lag behind, by comparison, will need to save more and store more wealth to accomplish the same goal.
There’s a term called liability matching in asset allocation. Liability matching is an investment strategy that matches future asset sales and income streams against the timing of expected future expenses. Bitcoin takes this concept and flips it on its head, allowing for goal matching. The longer a goal is out into the future, the better bitcoin is for saving for that goal, as I’ve previously explained about bitcoin and dollar cost averaging.
You don’t know how many dollars will be created between now and five years from now, but I can with confidence tell you how many new bitcoin will be issued. Which would be more reliable, in your view? The asset that costs $0 to produce, with an unlimited supply, or the asset with known rules, a network of fierce advocates and a cost associated with the creation of new units? We live in a world where dollars and bitcoin coexist, and it’s not an all-or-nothing decision.
How bitcoin can help clients in the long run
As a financial advisor, I believe the role and goal of asset allocation is to help mitigate risks and ensure client outcomes and objectives are accomplished. Today, the word on almost all clients’ minds is “inflation,” and what to do about it.
In my opinion, bitcoin is the remedy that helps ease these client concerns by allowing their savings to gain in value. In a world of plenty of uncertainty, money that costs nothing to create is a problem. Saving for goals is as challenging as ever, and inflation makes life cost more.
But bitcoin is ushering in a deflationary future, where an individual can create value, be paid and store that into the future for when needed, allowing savers to better enjoy the fruits of their labor. That change enables clients to achieve those lifelong goals sooner – and that’s all thanks to bitcoin’s open monetary network.