Cryptocurrency emerging as hedge against looming inflation
As the Covid-19 pandemic continues to rattle global economies, cryptocurrency, and its most popular coins bitcoin and Ethereum, have proven to be enticing assets for a flood of new and experienced, opportunistic investors. 2021 has seen many highly regarded financial institutions enter the fray, with suggestions that the next-gen asset class may be emerging as a possible inflation hedge, according to Australian-owned cryptocurrency exchange Cointree.
Most cryptocurrencies exist in limited supply and are not controlled by central authorities, meaning they can’t be devalued by governments or central banks as these institutions continue to print money at an historical rate, said CEO of Cointree, Shane Stevenson.
“The last time the threat of inflation hit in 2008, cryptocurrency hadn’t really entered the market as a serious asset class, now it has proven itself to be resilient,” he said.
“As many investors now know, most new coins enter circulation through a process called mining, which is not directly related to the distribution of fiscal currency by governments, or anything for that matter.
“As such, it could potentially serve to diversify a portfolio and hedge against inflation, something on the minds of many investors today.”
In the last couple of months, bitcoin has seen volatility generated by crypto commentators such as Elon Musk, or legislative risk such as the Chinese Communist Party’s decision to increase restrictions on any digital currency not generated withing China.
Positively, El Salvador declared its trust in the asset class by officially making bitcoin a legal tender in early June and the number of new investors estimated by the ATO sits at 600,000 since the beginning of 2020. Several other countries have also spoke favourably about bitcoin following El Salvador’s announcement, with some pledging to introduce legislature.
With the threat of inflation high on experts and investors’ minds, many are touting bitcoin as a correlation to assets such as shares, gold, cash, and commodities, but Cointree cautions investors from rushing into an asset class before taking time to fully understand it.
“When using currencies like bitcoin as a hedge, it is definitely risk-on compared to assets such as gold. Investors should always take the time to research thoroughly any asset that they are looking to invest into, and it is always sensible to speak with a financial adviser before making an investment,” said Mr Stevenson.
“For instance, we saw a heavy dip in the value of bitcoin in late May of about 40 per cent, which has since stabilised and is performing in a range around AUD $45,380. Even with the dip, that’s a solid increase of about 246 per cent when compared to its value this time last year.”
“This alongside the continuously growing number of investors is proof that cryptocurrency demand is still strong as it finds its place in investor portfolios. At Cointree alone we have seen a near 150% uplift in new members from last year.”
Some commentators have also compared the asset class to gold as a means to diversify, or even replace, an inflation hedge in a portfolio. No matter how high the value of cryptocurrencies climb they cannot be debased, they do not need to worry about transportation, and they are generally less vulnerable to government control.
Legislation changes must still be considered when considering allocating to cryptocurrency, as some governments have already taken steps to control the use of cryptocurrencies in their jurisdictions. Although many investors view this as an investment risk, Shane Stevenson welcomes further legislation from the Australian government.
“Australia is a society of investors, and we are known for the robust legislative framework that is adhered to by our financial services and investment community,” he said.
“Introducing rational and considered legislation to the cryptocurrency asset class is an inevitable step that must be taken if we are going to ensure the long-term sustainability of our markets and of cryptocurrencies.
“We welcome further investigation from government into cryptocurrencies as an acknowledgement of the potential of the asset class, and a step toward legitimatising crypto investment in Australian portfolios,” he said.