Bitcoin $BTC has been in the news lately after the halving, it reaching $10 000 and Paul Tudor Jones saying that it may be a good hedge against inflation. With all the money printing happening, inflation seems to be a certainty. Is investing in Bitcoin going to hedge against inflation? We will answer this question from the POV of a long-term fundamental value investor.
My best investment ever is not in any stocks but it is in Bitcoin and Ethereum $ETHEREUM where I made over 2000% in 2017. I bought Bitcoin at $900 and sold at $19 000 and bought Ethereum at $28 and sold at $750. Why did I invest in these cryptocurrencies? It is because I believed in the blockchain technology and was new to investing. I was still seeking a strategy that works for me. I didn't expect to make such huge profits. I just got lucky but selling at the top of the bubble was a smart move. That's after Warren Buffett and Jamie Dimon started calling out against Bitcoin.
Bitcoin can be either a currency or a store of value, it cannot be both. Gold, bonds, stocks are all store of value. People invest in them, hoping that their prices will go up and they will be able to sell later. Cash is currency. You don't invest in cash, you just save it so that you can use it later. Many people believe that Bitcoin is the currency of the future and that it will replace the US Dollar and other fiat currencies but this is unlikely since it is too volatile. A currency should be stable and most people who invest in Bitcoin today do so because they want the price to go higher, that is it is a store of value. If Bitcoin is going to replace something, it is not the US Dollar but Gold $GOLD .
There are three types of money: physical money (gold, silver), paper-money (notes backed by gold) and fiat currency (not backed by gold or anything). Bitcoin is more likely to become a physical money. We live in a fiat currency world but this will not always be the case. We will move back to physical currency someday. Is Bitcoin going to break the cycle after 5000 years and replace gold?
Before we can answer this question, we need to know what gives Bitcoin its value. It is physcology. Gold gets its value from its 5000 year history. The US Dollar gets its value from the US Government. Bitcoin gets its value from people who believe that the world will be globalized, decentralized and based on the internet in the future. But it is unlikely that this will be enough to replace gold or even the US Dollar.
Why is the price of Bitcoin rising again? Fear of Missing Out (FOMO). There is a clear correlation between Google Searches for Bitcoin and the price of Bitcoin.
Why Paul Tudor Jones invested in Bitcoin? He sees it as a speculation. It is only 1% of his portfolio. It is possible that Bitcoin goes to $100 000 and replaces gold. It is also possible that it goes to zero. That's why you should not invest too much of your portfolio in it.
Will I buy Bitcoin again? At this price, it is unlikely. But if it falls back to $3000, I may make a 1% investment. The best time to buy will be when everyone is selling it.
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