There's probably no other topic garnering more attention right now than inflation. In categories ranging from used cars to housing and gas to food, soaring prices are everywhere. And these increases are hurting many consumers, particularly those at the lower end of the socioeconomic spectrum.
There's no doubt that the unexpected surge in consumer demand following the pandemic, at a time when supply chains were not functioning at full capacity, probably is the main culprit of the current situation. Investors are likely wondering what the best course of action is in order to benefit from this trend.
If you're worried about the threat of inflation, there's a worthwhile asset to allocate a small percentage of your portfolio to: Bitcoin (BTC +0.59%).
Image source: Getty Images.
Why is inflation necessary?
It's worth taking a step back to understand why inflation exists. The constant devaluing of currency is a policy tool used to encourage consumers to spend. In a deflationary environment, on the other hand, consumers would just wait to buy goods and services because they expect prices to go down over time.
Deflation can lead to lower sales and profits for companies, which would cause employee layoffs, decreasing consumer spending, and ultimately a shrinking economy. Obviously, this scenario should be avoided, so a minimal amount of inflation is used to spur growth. In the U.S., the Federal Reserve targets an annual inflation rate of 2% over the long term, a figure monetary policy makers believe leads to a healthy economy.
In response to the coronavirus pandemic, the Fed pumped an unprecedented amount of money into the economy to quickly get the country out of a recession. Other major economies, including the European Union and Japan, reacted in a similar way. The result is the inflation that we're seeing right now.
What if there was an asset out there that allowed investors to essentially sell short all the massive money printing happening across the globe? Luckily, there is.
Bitcoin: Shorting the world's fiat currencies
Bitcoin is an excellent investment, especially since owning it means betting against the world's fiat currencies. This is because the amount of Bitcoin in circulation will decrease relative to every other currency out there. There will only ever be 21 million Bitcoin mined, and it's etched in the blockchain's code, so no one can tamper with it.
The M2 money supply, which is all money held in checking and savings accounts in the U.S., jumped significantly in the spring of 2020, and it has risen a lot since then. Based purely on this dynamic, where there will simply be a perpetually growing amount of dollars relative to the fixed supply of Bitcoin, the crypto's value should appreciate as time passes.
When you view Bitcoin in this light, it's easy to see why proponents of the world's most valuable cryptocurrency are so supportive of it. Institutions are also beginning to view Bitcoin as a legitimate store of value. There are Bitcoin exchange-traded funds on the market. And large corporations like Block (formerly Square), MicroStrategy, and Tesla are allocating portions of their balance sheets to Bitcoin and away from cash. I expect this trend to continue.
If an individual not only maintains but increases their purchasing power over time by owning a particular asset, that asset is a solid place to invest if inflation is high. How has Bitcoin performed in this regard? The world's most valuable cryptocurrency has skyrocketed 39,000% in value from May 2013 (the earliest data provided by Coin Market Cap) to Jan. 20, trouncing any other financial asset's performance during this period. Meanwhile, inflation, as measured by the consumer price index, has increased 23.3% over the past decade.
Clearly, there hasn't been a better investment to own in general, let alone if you're worried about inflation, than Bitcoin. Although the volatility is difficult for most people to stomach, I think it makes sense to allocate 1% of your portfolio to Bitcoin.
