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Why Advisors Should Keep Clients Out of Bitcoin This Year

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MarketWatch

Thu, Jun 23, 2022

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The primary broken promise is the notion Bitcoin was a hedge against inflation.

The Peso is down 17% against the U.S. dollar, but Bitcoin has plunged 56% in that time.

And despite the U.S. consumer’s experience of four-decade-high inflation, just holding dollars would have been smarter than buying Bitcoin this year.

Setting the Bitcoin inflation fail aside, , it’s abundantly clear that an instrument that suddenly falls 56% is not a hedge against anything.

Bitcoin has had many increases and many declines over the years.

If the magical inflation-hedging power of Bitcoin and other cryptocurrencies is indeed broken, then advisors would do well to consider the implications.

While Bitcoin is down 56%, there are lots of other securities trading at suddenly lower prices that are truly investments, in the sense that they are backed by real assets, unlike cryptocurrencies, which are backed by nothing.

If you could put a dollar into Nvidia (NVDA), one of the world’s greatest chip makers, which is down 45% this year, and down 53% from its 12-month high, you’d likely be a lot better off with that than a dollar of Bitcoin.

As an instrument with no yield, Bitcoin is suddenly on the wrong side of the risk-off trade.

Even if speculators don’t flee Bitcoin for stocks or bonds, its loss of status as an inflation hedge has a potential knock-on effect that could damage the price of the currency.

The data reveals that the vast majority of Bitcoin is not used in transactions, and, in most cases, hasn’t been for years.

The hodler phenomenon is presumably a reflection of the belief Bitcoin would be a store of value as it increases in price.

If that assumption is now broken with the collapse of Bitcoin in the face of inflation, then there could be fewer parties hodling—and more looking to sell Consider that a growing number of establishments now accept payment in Bitcoin and other cryptocurrencies.

If fewer Bitcoins are kept by parties such as Equinox, increasing the number in circulation, it could have an overall downward pressure on Bitcoin’s price.

An early promise, along with inflation hedging, was that use of Bitcoin would be anonymous.

The authors write in the report that because there are at most “six degrees of separation” between any two bitcoin transactions, and usually, four or fewer, it is possible using detective work to “de-anonymize nearly any target bitcoin address by tracing at most 6 transactions.” The implications are large for cryptocurrencies in general, which have appealed to criminals because they apparently had no paper trail.

Bitcoin’s price of just under $21,000 brings the instrument back to a level last seen in December of 2020.

But as Coinbase’s CFO Haas points out, this is the first time Bitcoin has faced a risk-off environment.

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