While we have already laid out our investment thesis for bitcoin as an asset class worthy of inclusion into an investment portfolio, there are still many who have seen the meteoric price increase of the last six months and determined that this is a "bubble" waiting to burst. Interestingly, the price of bitcoin has been burst no less than three times in the past ten years. Each time it had moved higher afterward due to increasing utility and demand. Bubbles are not supposed to do this --- they are characterized as such so that they cannot gently deflate and must burst, never to return.

Gold is traditionally thought of as an inflationary hedge, but its price has declined this year in the face of increased inflationary fears, and especially relative to the price of silver. In fact, in terms of silver, the price of gold has dropped almost 50% since COVID started last year. While gold has some industrial value, and silver even more so, their primary value is in the eye of the beholder as a store of value during inflationary periods. The market price does not justify significant intrinsic value, and while the same may be said of any currency, there is no government standing behind precious metals. The same can be said for bitcoin.

A better way to factor a valuation is to look at the relationship between gold and treasury bonds. Generally, treasuries outperform gold when markets are not concerned about inflation, while gold outperforms when there are inflationary concerns. However, currently both gold and treasuries are falling, even though there is widespread concern regarding future inflation as a result of the pandemic-related government stimulus, which is considered to be potentially inflationary. Meanwhile, bitcoin has been making new highs.

If investors are truly worried about the long-term buying power of government-issued currencies, then gold should be rising in price, as it is perceived to be a store of value. One theory is that bitcoin has emerged as an alternative "anti-flat" asset. It has gained popularity given the rise of anti-government sentiment that has been seen globally over the past few years and has been one of the central themes of all digital currencies since inception.

Bitcoin's performance over the last year is more directly aligned with movements in bond yields. As yields have risen, so has the price of bitcoin. The implication is that digital currency is benefitting from the belief that inflation is coming. While there is significantly more volatility in the price of bitcoin than gold, the fact remains that the price of bitcoin is acting the way gold should be in the face of impending inflation expectations.

Bitcoin and gold are both inflation-sensitive, but gold tends to outperform in economic downturns. In contrast, bitcoin seems to outperform during a stronger economy, even when the yield is rising. This is where we see global economies today, which helps to explain the differing price movements, as well as the overall resilience of equity markets. Bitcoin seems to be positioned as a better store of value against currency devaluation rather than gold. It has been designed so that the supply of new coins will reduce over time, and greater usage will continually skew the supply/demand dynamic upwards. While bitcoin will have more volatility and price declines than gold, the ever-limiting supply/demand dynamic means that one has to hold significantly less of the asset to achieve the same or even better protection. For gold to achieve the same inflation or devaluation protection as bitcoin, one would have to 4 or 5 times the amount, which can be a significant drag on overall portfolio performance.