Bitcoin – A Currency AND Asset

Bitcoin today must appear as something of a dilemma to the more cautious investor. Out of nowhere, it has exploded onto the scene, and in a decade has gone from strength to strength. And yet it seems so volatile as to defy any standard of valuation with which investors might feel they better understand it – they’re more often than not left wondering if it’s just a super speculative bubble. Though no doubt it has appeared to be that at times, and especially on the lengthy corrections. However, there is a rational and real trend that underlies these appearances. If we understand these, it will be able to provide a rationale by which the more cautious investor might start gaining some exposure to this asset class.

Transitioning from an insignificant valuation to a quarter of a trillion-dollar market cap in such a short time, Bitcoin’s extreme volatility should come as no surprise. At times, it has seemed to be quite literally ‘off the charts’, as something wild and incomprehensible, the very epitome of chaotic speculation.

Given the background of an uncertain macro-economic landscape, the Bitcoin chart presents itself as something of a conundrum. On the one hand, with inflationary concerns in mind, Bitcoin is considered to be the perfect response, where it functions as an inflation hedge, a sponge of sorts like any asset, to soak up all the excess liquidity perceived to be in abundance. On the other hand, those deflationary forces remain defiant and hang over asset prices. You don’t have to go back many years to see central banks boasting that deflation was of zero concern given their ability to manage conventional currencies. With the benefit of hindsight, we can see that was not the case. 

When faced with the phenomenon that is Bitcoin, investors can find themselves stuck between a rock and a hard place, between two competing narratives calling for a decision. They may jump one way or the other but may just as likely remain immobile and non-committal unable to move when confronted on either side with two equally attractive arguments for owning bitcoin. The way out of this dilemma as it involves investing in Bitcoin or not is to re-think what Bitcoin actually is from a macro-economic perspective. If Bitcoin can be beneficiary in both an inflationary and deflationary economy, then investment in Bitcoin becomes a much less apprehensive decision.

What is common to both narratives here, as is typified in the ‘inflation/deflation debate’, is an understanding of Bitcoin as an asset. It is due to this common understanding that one camp is willing to buy Bitcoin and the other is not - in inflation, asset prices go up; in deflation, asset prices go down. Yet the picture changes radically when instead of conceiving Bitcoin as an asset, we conceive of it also as a currency. Now, for those also in the deflationary camp Bitcoin becomes attractive. During times of deflation, monetary value erodes out of assets and into the strongest currencies/ forms of liquidity, and Bitcoin is just one such form of liquidity. Bitcoin has always claimed to be a currency, a form of money. Indeed, it was to solve the perceived problems facing conventional currencies that it was created in the first place – a monetary response to a monetary problem.

Deflationary concerns also go some way to explaining the volatile swings in Bitcoin to the downside, which have always been proportional corrections to the previous exponential moves to the upside. As much of BTC investment seemingly involves buying it as an asset/ inflation hedge, and then again on pure speculation, it’s no surprise that price should correct when uncertainty once again dominates the market, as to either the speculative price or to the wider macro-economic landscape. Yet, once corrected, the price becomes

more sustainable.

In keeping with this idea of Bitcoin as currency, the real and substantial parallel for Bitcoin, the newest form of money on the block, is not some asset class but is rather gold, one of the oldest forms of money known to us. And indeed, Bitcoin has often been referred to as digital gold - for reasons primarily involving the notion of scarcity. Of course, we understand gold as a currency, then why not think of Bitcoin in the same light?

As Bitcoin matures in the marketplace, as it becomes increasingly capitalised, as liquidity increases, so too you'd expect to see decreasing volatility in the macrocycles. And this is exactly what has been observed in the past. Though the gains may no longer be astronomical, they are still projected to be stratospheric. And what is lost in the ‘wild west’ that was the early days of bitcoin, may be gained by seeing it mature into a more stable store of value.

Once the dual nature of Bitcoin is established, as both a currency and an asset, in much the way that gold is, any investor attracted to gold as part of their portfolio is likewise going to be attracted to Bitcoin. Early investors will get the added benefit that this promising currency has yet to be fully capitalised. Securing a position in both gold and Bitcoin offers that diversification which is always a fundamental consideration of any portfolio.