Kamis, 18 Februari 2021

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If you are looking for proof that the financial markets are in uncharted t...
Are you on the list?

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Bitcoin: The Antidote for Monetary Policy
By Jim Pearce

If you are looking for proof that the financial markets are in uncharted territory, consider what is happening with Bitcoin (BTC). For the uninitiated, Bitcoin is a cryptocurrency based on blockchain technology that purportedly makes it impervious to forgery and theft.

The severe price swings of Bitcoin recently make the stock market look tame by comparison. Since bottoming out below $5,000 last March, the price of a single Bitcoin rose above $48,000 last week for a gain of more than 1,000% in less than a year.

Few investments can claim those types of results. Over the past 11 months, electric vehicle (EV) company Tesla (NSDQ: TSLA) has increased more than 10 times in value. If you had the foresight to buy Novavax (NSDQ: NVAX) a year ago, you would be looking at a gain of nearly 4,000% this week!

There is a good reason why stocks such as TSLA and NVAX sometimes soar in value. Tesla is the world's premier EV manufacture while Novavax has developed an effective vaccine for COVID-19. Those products provide considerable economic value. Their shareholders deserve to be rewarded for capitalizing those businesses when their prospects were considerably less certain.

As for Bitcoin, its strongest attribute seems to be that it has become the cryptocurrency of choice for some of Wall Street's biggest social media influencers. Tesla founder and CEO Elon Musk recently revealed that the company purchased $1.5 billion of Bitcoin.

Read This Story: Elon Musk and The Bitcoin Buzz, Explained

Last month, Musk triggered a stampede into a tiny stock when one of his tweets was misinterpreted by his 40 million Twitter followers as a buy signal. His endorsement of Bitcoin two weeks ago ignited a 50% jump in its price.

Too Much Money

Musk's influence aside, one reason to own Bitcoin is as a hedge against future inflation. Inflation is sometimes defined as "too many dollars chasing too few goods."

The world's largest central banks have been spending a lot of money lately in response to the coronavirus pandemic. That money is being used to keep the global economy from collapsing, so there is little inflationary pressure at the moment.

However, long after COVID-19 has been contained, most of that money will still be in circulation. At that point, central bankers will most likely allow interest rates to rise to make that money more expensive to borrow.

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That translates into rising inflation, which in turn dilutes the value of a currency. With unemployment above 6%, we are not at, or even near, that point yet. But wait a few years and the risk of inflation could become a real threat to the American dollar.

At that point, owning Bitcoin instead of dollars could make a lot of sense. That's because Bitcoin is not a fiat currency. It is not issued by any country and it is not backed by a commodity such as gold.

Instead, Bitcoin is a finite resource that has value because people agree that it has value. As long as that remains the case, Bitcoin will be a viable alternative to the dollar and other global currencies.

If the threat of future inflation is the primary reason for Bitcoin's rapid rise, then that has profound implications for the stock and bond markets. Earlier this week, I commented on the recent surge of commodity stocks, which are widely viewed as a harbinger of inflation.

When viewed through the prism of monetary policy, the recent behavior of Bitcoin (and commodity stocks) makes perfect sense.

Too Few Goods

The problem for most investors is that Bitcoin is expensive and difficult to obtain. At the moment, it is mostly the province of wealthy individual investors and hedge funds.

Unfortunately, there is not yet an exchange-traded fund (ETF) that owns Bitcoin. In theory, such a fund could be structured similarly to the SPDR Gold Shares (GLD) ETF, which only owns gold bullion.

That may soon change, at which time small investors can get in on the Bitcoin boom. The U.S. Securities and Exchange Commission (SEC) is currently reviewing an application for a Bitcoin ETF.

Until then, there is a publicly traded security that owns Bitcoin but its minimum investment requirement is $50,000. The Grayscale Bitcoin Trust (OTC: GBTC) holds only Bitcoin in its $8 billion portfolio.

This fund is restricted to accredited investors, so not everyone is eligible to buy it. However, it can be held in qualified retirement plans such as Individual Retirement Accounts, which is not the case with Bitcoin.

Conceptually, I am warming up the idea of cryptocurrency as an alternative asset class. However, it is not yet clear to me why one cryptocurrency is preferable to another since they share the same attributes.

That's why I do not own Bitcoin. Its future value is dependent on variables that cannot be predicted. Instead, I prefer investment strategies that have a proven history of living up to expectations.

As my above article makes clear, risks still lurk around the corner. More than ever, you need to be selective with your investments.

That's why our investment team has put together a special report: "5 Red Hot Stocks to Own in 2021." In this report, we provide the names and ticker symbols of the highest-quality stocks to own for the new year. Click here for your copy.


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