Experts suggest that bitcoin is an effective hedge against excessive government spending and recommend that institutions adopt a bitcoin asset allocation of about 5% of their assets. BlackRock CEO Larry Fink, previously a “proud skeptic” when it came to bitcoin, changed his mind after studying it more and is now a “major believer” in bitcoin investing. This endorsement from a leading financial authority highlights the growing acceptance of bitcoin as a valuable component of a diversified investment portfolio.
What It Means for Institutional Investors
The United States has spent an eye-popping $5.02 trillion through the first three quarters of fiscal year 2024. Though the federal government insists spending at such a rapid pace is necessary to “ensure the well-being” of the nation’s citizens, critical thinkers are justified in questioning the spending spree. Government spending fueled by arguably negligent money-printing has been on the rise across recent decades, with an especially large spike during the COVID-19 pandemic.
Churning out dollar after dollar gradually weakens the value of the nation’s domestic currency. Simply put, excessive government spending causes inflation. Inflation devalues savings and the value of money stored in traditional investment vehicles such as stocks, ETFs, and mutual funds. Institutional investors are encouraged to hedge against growing inflation using bitcoin.
Larry Fink’s Perspective on Bitcoin
The CEO of BlackRock, Larry Fink, is pounding the table in favor of bitcoin. Fink, one of the most respected minds in the financial world, advises institutional investors to hold 5% of their assets in bitcoin. The bitcoin endorsement from one of the financial industry’s leading figures raised some eyebrows for good reason: bitcoin has often been stereotyped as a high-tech passing fad.
Fink’s recommendation of bitcoin makes him a profile in courage. The BlackRock head is bravely demonstrating irreverence for accepted financial convention. Fink’s logic in recommending bitcoin institutional investment is that it offsets potential asset devaluation caused by ongoing inflation.
Fink stated that bitcoin “is an asset class that protects you.” Though one can argue that bitcoin and other cryptocurrencies play a part in causing inflation as they have increased in value without providing utility beyond blockchain technology, they are also relatively safe havens when the government money printing presses are inevitably fired up.
Bitcoin’s Role as an Inflation Hedge
Inflation has steered some investors away from stocks, mutual funds, and even some precious metals in favor of bitcoin and other cryptocurrencies. The attraction of bitcoin is that it’s an alternative value store with a historically inverse relationship to inflation. Though bitcoin hasn’t reached a mainstream saturation point as a digital currency, it might one day replace fiat currencies in some countries.
Here’s the bottom line: the American dollar is gradually losing value while bitcoin is gaining value. An infinite number of dollars can be printed by the federal government’s presses. However, there’s a finite upper limit to how many bitcoins can ever be mined. The artificially created yet very real scarcity of the blockchain-backed bitcoin gives it inherent value.
Fink’s Take on Bitcoin vs. Gold
Those still on the fence as to whether bitcoin will remain a safe haven amidst inflation and economic uncertainty are encouraged to consider Fink’s take on other conventional value stores, such as gold. As Fink noted, it is possible to find and even manufacture new gold. However, only so many bitcoins can be mined.
Fink’s willingness to formally and publicly endorse bitcoin is symbolic of the growing acceptance of cryptocurrencies as legitimate investments. Well-balanced portfolios now include a diverse combination of stocks, ETFs, mutual funds, bonds, and bitcoin.
Understanding the Bitcoin Hedge Concept
The gradual weakening of the dollar requires a financial “hedge” in an investment vehicle that either maintains value or increases in value. Institutional investors that fail to hedge with bitcoin could gradually lose value in traditional stocks, mutual funds, and other investment vehicles tied to the dollar.
A cryptocurrency investment strategy that puts 5% of your portfolio in bitcoin will help you get through periods of inflation. Though there is the potential for inflation to eventually tail off, it is in the federal government’s interest to continue printing more dollars. Ongoing inflation helps to offset the economic weight of the nation’s staggering $35 trillion debt. The national debt becomes less significant as more dollars are printed simply because firing up the currency printing presses reduces the value of each dollar. A weaker dollar essentially shrinks the national debt as the money borrowed in years past becomes less burdensome to pay down with currency devaluation.
Bitcoin’s Cap and Inflation Mechanism
Though few know it, Bitcoin’s mysterious creator, Satoshi Nakamoto, designed Bitcoin with an internal inflation mechanism. Bitcoin was expertly programmed to top out at a maximum quantity. The artificial cap of bitcoins available for circulation is set at 21 million units. The rationale for capping the cryptocurrency at this level is to keep it on par with gold’s stable rate of inflation. As a result, institutional and retail investors have flocked to both bitcoin and gold as refuges during periods of inflation and geopolitical or economic turmoil.
At the moment, it is estimated that 18 million bitcoins are in circulation. The cryptocurrency will eventually reach its aggregate supply cap of 21 million units. Each bitcoin that is digitally mined is verified using the cryptocurrency’s built-in blockchain network. The general consensus is that bitcoin’s underlying blockchain cannot be hacked. As a result, institutional investors are adding bitcoin to their portfolios with full confidence.
Institutional Investment in Bitcoin
When bitcoin first debuted, institutional investors took a pass, insisting it was merely a tech industry trend without staying power. Times and attitudes have changed. Institutional investors are now moving money into bitcoin as an endorsement of its underlying blockchain technology.
Institutional investors also recognize bitcoin might be selected as the world’s primary digital currency in the years ahead. Add in the aforementioned inherent bitcoin hedge against inflation and there is even more reason for institutional investors to pour money into the cryptocurrency.
Bitcoin does have some risks of note. For one, bitcoin has been notoriously volatile. Take a look at a multi-year bitcoin chart and you’ll find it has significant price fluctuations. Moreover, there is also a chance that other cryptocurrencies will arise or potentially even replace bitcoin as the world’s preferred crypto.
Also, proposed legislation that could change the regulatory landscape for cryptocurrencies in the U.S. is currently making its way through Congress. Institutions considering bitcoin investing should seek professional guidance and legal consultation.
How to Approach Bitcoin Investment
Do your due diligence before allocating a percentage of your portfolio to bitcoin or other cryptocurrencies. Prospective investors should be aware that investing directly in bitcoin requires storing and accessing funds through a passworded digital wallet or a custodial account on a crypto currency exchange. Historically, the collapse of cryptocurrency exchanges has been a significant risk in this sector. We are impressed by the recent emergence of cryptocurrency ETFs as a more secure and familiar option. Among other reasons, many of the bitcoin ETFs store their bitcoin with institutional custodians or with dedicated high security bitcoin storage providers. Another option is investment in publicly traded bitcoin mining companies that store large quantities of bitcoin earned as mining rewards. If you have been ignoring the crypto sector, it may be time to take another look.