Beat Declining Purchasing Power with Digital Assets as a Store of Value
This is the 3rd blog in our series on Diversifying Your Portfolio with Blockchain Assets: A Guide for Investors.
Through our examination of cryptocurrencies, and more specifically BTC as an asset class, one of the most prominent advantages to the top performers is the store of value against many other traditional assets. Many narratives have been developed over the years for Bitcoin—one being that it acts as an inflation hedge, and another is that it acts as a liquidity hedge.
Due to quantitative easing that has been rampant since 2008, and as of recent quantitative tightening most likely coming to an end, global assets have gone through some serious asset price inflation. What this means in relation to major central banks balance sheets is that most equities have traded sideways over the last 15 years. Furthermore, gold and commercial real estate in many instances depreciated or at best had minimal appreciation due to inflation. BTC and other top-performing crypto assets have outperformed the banks balance sheets consistently throughout the duration of this period.
Credit: Published by Walduske, Tradingview
Summary of the above graph:
Net liquidity is shown in red (treasury + Reserve Repo)
Price of Bitcoin is shown in Blue
BTC responds to credit expansion on central bank balance sheets, driven by the necessity for perpetual growth in a credit-based system. In other words, BTC at a baseline increases in value as more capital is printed, which will never end in a fiat-based system.
Realized Cap
One unique indicator of BTC’s measurement as a store of value is its “realized capitalization.” This varies from a traditional measure market cap, in that the last transfer price of each Bitcoin is used rather than the current market price.
By using this data, realized capitalization is an aggregate cost basis of Bitcoin’s on-chain users. The total realized capitalization is a harbinger of the sentiment towards BTC providing the amount of money that has been stored in the network over time. In other words, as realized cap increases, this signals that transfers are made at higher prices than before. If realized cap decreases, then aggregate owners of BTC are selling at a loss. “According to Glassnode data, Bitcoin stores a total of about $380 billion in value, down from a peak of $460 billion. But, importantly, this is four times more than in December 2017 – when Bitcoin was priced around where it is today. So, money has flowed into the network – to store value.” (Coindesk.com)
Finally, examining holding trends in the chart below we can see that the overall duration of long-term holders is increasing. This is one huge advantage of examining blockchain assets as the analytics are all on-chain, available 24/7 to everyone and immutable.
Summary
BTC and other high-performing cryptocurrencies' historical performance, declining volatility, and minimal correlation to other traditional assets make a strong case for BTC’s role as a store of value and crypto as its own distinct asset class worth a seat at the table. The higher risk profile only exists in relatively short investment windows. Many notable cryptocurrency tokens have proven that crypto can be a formidable investment, even at a small market capitalization. Raul Pal has coined the current era as the “Exponential Age,” and I think this is one of the easiest ways to understand the transformation currently taking place. The exponential age is the convergence of digital assets, tech and macroeconomics.
Crypto adoption is on the rise, and cryptocurrencies are not going away. If blockchain assets are not already integrated into your crypto portfolio, they should be considered a welcomed addition over the course of the next few years and beyond.
This is the 3rd blog in our Diversifying Your Portfolio with Blockchain Assets series. If you missed the previous blogs, head over to:
Diversifying Your Portfolio: Is There Room for Crypto in Your Wealth Management Plan?
Diversifying Your Portfolio with Blockchain Assets: Is the Return Worth the Risk?
