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What’s the game plan for risk-on assets such as Bitcoin in 2022? I think most people would agree that on the whole, 2021 was a turbulent financial year. It would be easy to point the blame at COVID-19, as it undoubtedly decimated many sectors due to widespread global restrictions and thus paved the way for higher inflation and quantitative easing. However, this current monetary policy has been going on long before the outbreak of COVID-19 in 2020. In fact, it’s been like this ever since the US left the gold standard back in 1971, it’s just the effects are not as prominent as they are today. After 1971, there became no barometer for sound money and as such, effectively gave free rein for governments to print more fiat money, whilst creating a credit-based system now full of debt.
This debt cannot be paid back, otherwise, the inevitable collapse would initiate a recession comfortably eclipsing the 1930s. Instead, we see widespread asset inflation in the form of real estate, stocks, and Bitcoin as everyone seeks to beat inflation. As we move into a new year, will things remain the same or is a big crash looming?
Investor sentiment can change rather quickly depending on the current state of the economy, policies that are introduced, and what confidence people have. When there is perceived confidence in the economy, investors tend to move into Risk-On assets such as stocks and, most recently, digital assets (crypto). On the other hand, when many are fearful or amid a financial crisis like in 2008, you will see investors flock to traditional, safer haven assets including bonds and gold.
In Q3 of 2021, inflation in the US jumped to a three-decade high of over 6%, sounding the alarm bells for many investors. Whilst many investors have been aware of this growing concern (some believing it is much higher than reported), others not invested have not been aware…until now. You can see it everywhere around you whether it be the price of petrol, all the way to the cost of bread or a haircut. At what point does this not become sustainable? In theory, if prices of goods and services are rising, then wages must also increase to accommodate the change. However, wages are largely staying the same, therefore making it impossible to keep up with inflation. Unfortunately, Turkey is experiencing max pain of hyper-inflation, whereby the cost of supply is too much to produce, leaving an over-inflated currency and depressed citizens with no savings.
Many other countries are in a similar predicament and are choosing assets as a means to tackle this issue. But, it is easier said than done when traditional risk-off assets are performing worse than risk-on assets. For example, in 2021, US treasury bonds returned -4% and gold returned -4%. Whereas the S&P 500 rose 29%, real estate returned 46% and Bitcoin a whopping 60%. As a result, it has led many to start dismissing gold’s narrative as the go-to inflation hedge, when it humiliatingly failed to beat real inflation itself! It also cannot be understated the fact if you solely held cash, which by virtue should hold value, actually went down in purchasing power by 10-15% conservatively.,
So, does that make Bitcoin a better store of value than gold? The short answer is yes. Bitcoin has comfortably outperformed gold since its existence, and most notably, outperformed gold by 64% in what was a record-breaking inflation year in 2021. With that said, Bitcoin unquestionably remains a risk-on asset for 2022 and beyond. It is incredibly volatile, fluctuates 5% daily, but it has properties that undermine all fiat currencies and even gold too. It’s got a fixed supply that cannot be tampered with or inflated like all other fiat currencies. It can be easily transported and its supply cannot be manipulated unlike gold. Therefore, it is becoming more of a viable alternative to risk-off assets in comparison. As time goes by and adoption increases, its transition to becoming a risk-off asset is more than conceivable.
As there seems to be no end in sight to inflation and money-printing, there is no reason why risk-on assets, in particular Bitcoin, should not continue to flourish in 2022. There is always the possibility of short-term measures from governments to alleviate the strain of inflation through quantitative easing measures or tapering. However, it will only paper over the cracks of what is a widespread systemic issue caused by governments in control of the never-ending printing machine.
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