Bitcoin – A Risk-On Inflationary Hedge Asset That Is A Form Of Property?

An Unanswered Question

Ever since Bitcoin was created, people have battled to find a definitive description for the Cryptocurrency. Initially, it was widely viewed as “internet money”. As Bitcoin adoption increased, so did its use cases. We went from internet money to a speculative asset, to a store of value, and so on. However, 13 years later and we still don’t really know how to describe or categorize Bitcoin as an asset. I would suggest that it is because Bitcoin cannot be classified according to existing assets.

For some reason, this reasoning doesn’t seem to enter the minds of many. However, if something is unique and new how can you compare it to what already exists? That doesn’t make much sense and yet people continue to try and associate it with existing asset classes. In essence, Bitcoin meets the criteria of several asset classes. However, for now, Bitcoin is largely seen and interpreted as a risk-on asset. This ultimately decides Bitcoin’s fate in the short term and explains why it has been unable to break away from the S&P.

On the other hand, even gold is sinking deeper into negative territory when it should be attracting investors. This is no surprise to Sapphire Crypto subscribers, we addressed this at length back in 2020 and 2021. The store-of-value dynamic of gold is now officially broken. This is based on data from the past 10 years, not 10 months, which is the timeframe many are using to try and classify Bitcoin’s position as a store of value. If this topic interests you, a previous article attempts to address this dynamic and explains how short timeframes cannot be used to determine whether an asset is a store of value or not.

Bitcoin’s Price Action

If we are to examine Bitcoin’s price action, we are able to see and agree on the following:

  • Bitcoin is extremely volatile in the short term
  • Bitcoin appreciates significantly over time

Even though this dynamic has been “tamed” to some extent, it is still very much applicable. From the 2020 low to the 2021 high Bitcoin still managed to appreciate by approximately 1700%, which is still amazing, by any standards. An asset that can appreciate so much in such a short period of time theoretically exceeds the significant losses that also likewise occur during short periods of time. Periods similar to what we are currently experiencing. In other words, if you purchased Bitcoin at any time prior to March 2020, you would still be sitting on an enormous amount of profit, simultaneously, beating inflation.

Over a multi-year period, Bitcoin annihilates inflation, which is how any asset that is able to conquer inflation behaves. You cannot defeat inflation “by design” on a month-to-month timeframe, that’s not how inflationary hedges behave. Essentially Bitcoin is an inflation hedge until proven otherwise. That will however require years in order to be proven. My guess is that in years to come, BTC will be valued well over $100K, subsequently maintaining its status as an inflationary hedge.

A Property That Can Be Used As Currency

The US currently views Bitcoin as a form of property and has done so since 2014. Bitcoin is in essence a form of digital property that is comprised of “energy”. This “property” can be held as traditional property that appreciates over time, or as a form of currency, which can be used for payments. Once again, Bitcoin is taking a page from numerous asset classes and utilizing all of them simultaneously. Investing in some type of property will usually see you have to sell the property in order to utilize its value as currency. Bitcoin is able to do both in its state of “captured energy”. An investment-grade asset by default, simultaneously a currency, which can be used for payments and purchases.

As I mentioned earlier on, the dynamics of Bitcoin are unique, and trying to categorize it according to existing definitions is like trying to push a square peg into a round hole. Bitcoin is uniquely multi-faceted, unlike any other asset, and as such should not be classed alongside any other existing asset.

Unfortunately, this is part of the problem we are currently experiencing in regard to Crypto adoption. Bitcoin is being added to the current monetary system. In a perfect world, it should replace the current monetary system. However, I do believe that time will ultimately bring about the desired outcome. Bitcoin is in many ways like a trojan horse, in that it will only be effective once it has entered the realm it intends to overcome.

Leave a Reply

%d bloggers like this: