It was supposed to be Bitcoin’s time to shine. Inflation is racing and Vladimir Putin is uttering undisguised threats of nuclear war. A super-secure, super-rare digital currency was supposed to be the thing that would retain its value in the face of double shit.
Instead, bitcoin crashed, trading at $39,040 on March 8, down nearly half from an all-time high of $69,000 in November. It looks more like the Russian ruble than a gold bar.
So is it time to buy? If all the crypto bros loved bitcoin at nosebleed prices, should you love it now that it’s closer to earth? Will he start behaving like his fans say he should in these troubled times and make you rich?
To answer this question, you need to know a few things about inflation and bitcoin.
Can Bitcoin Dodge Inflation?
First, inflation: it is defined as a general increase in prices. Not just for beer or bok choy, but for everything. This often happens when there are too many dollars for too few goods.
This is happening now. The US government has issued millions of checks to help people through the pandemic. The Federal Reserve has kept interest rates low to encourage people to borrow, and borrowing creates money (trust us). To top it off, the stock market rebounded, making the rich richer.
At the same time, supply chains got tangled and it became impossible to get all the fire pits, cross-country skis and huge TVs we wanted, so people became willing to part with more than those abundant dollars to get them. Boom, inflation.
Now bitcoins. Unlike the dollar and other “fiat” currencies, the number of bitcoins is limited to 21 million, once they are all unlocked by “miners” who are paid in new bitcoins to maintain the computerized ledger that keeps track of who owns how many?
Because no one can print a large number of bitcoins – like the US government can print dollars – there should never be too many bitcoins for too few goods, so bitcoin should hold its value in the face of inflation . Instead, he fell.
So what was wrong?
Brandon Wooters, financial adviser at Edward Jones, says to avoid bitcoin and other cryptocurrencies, regardless of price.
“My clients aren’t here for the roller coaster ride,” says Wooters.
There are no sales or profits, as with stocks, or interest payments, as with bonds, to help investors estimate the value of bitcoin, Wooters says. “The price of bitcoin is determined solely by what people are willing to pay for it.”
And, while there are only ever 21 million bitcoins, there are dozens of other cryptocoins – ethereum, avalanche, cardano, solana, polkadot, monero, TRON, dogecoin (created as a joke) – and d others are hit every day. Talk about inflation.
“If Paris Hilton is issuing its own crypto product, the whole concept of limited issuance is outdated,” says Chris Abbruzzese, co-founder of Rain Capital Management.
Earlier this year, Hilton issued a series of non-fungible tokens, digital works of art whose uniqueness is guaranteed by a blockchain, the technology underlying cryptocurrencies. NFTs are the web’s answer to collecting baseball cards. They appeal to the same people who buy bitcoin, further overwhelming the crypto bazaar.
If Not Bitcoin, Then What?
So what should an investor do in the face of inflation? You have to do something, because if inflation is 7.5%, then that $1,000 you stashed in your mattress is losing $75 a year in terms of what you can buy with it.
Wooters and Abbruzzese suggest something far less exotic: stocks. And not sexy, losing tech stocks. You need businesses that generate reliable sales and profits.
Inflation is a vicious circle. Prices are rising, so workers are demanding higher wages to make ends meet. They spend the increase on more goods, prices go up, and so on. Profitable enterprises can raise the prices of their products when the cost of labor rises, thereby preserving profits.
“Equities have built-in inflation protection,” says Wooters.
So how do you find lucrative stocks? Many are grouped into “value” oriented index funds. On Wall Street, a value stock is a stock that hasn’t soared into the stratosphere because people think it’s going to be the next Google.
For example, an exchange-traded fund called SPDR Portfolio S&P 500 Value ETF (ticker: SPYV) owns companies like Johnson & Johnson, Exxon Mobil, and Walt Disney. Each can be bad in their own way, but all produce relatively reliable sales and profits.
Other funds avoid oil and gas but retain inflation protection by holding big, established names. The SPDR S&P 500 Fossil Fuel Reserves Free ETF (ticker: SPYX) owns companies like Apple, Microsoft, Alphabet, Amazon and Berkshire Hathaway, which have pricing power and consistently generate profits.
Still Curious About Bitcoin? Mike Zaccardi, an investment writer who contributes to a no-nonsense site called HumbleDollar, says it makes sense to put a tiny chunk of your nest egg into crypto, just in case the crypto boosters are right and that’s it. future of money.
“At 1 or 2% of your wallet, you won’t lose your shirt,” says Zaccardi.
See more of a Portlander guide to surviving inflation here!