Can Bitcoin hedge inflation and diversify risks?
In addition to the value of inflation hedges, Bitcoin also provides the value of cross-border payments and capital transfers. If more people and institutions accept Bitcoin, then we may achieve cross-border payments and transfers with zero-cost, a disruptive revolution to the global banking system. The prospect of this use alone is enough to make Bitcoin a hot asset. Since Bitcoin is not a stock or a bond, it can reduce the volatility of the investment portfolio and increase the ratio of the investment portfolio.
In fact, Bitcoin has indeed been favored by some institutions and companies and become their investment target. For example, BlackRock, the world’s largest asset management fund group, announced in 2020 that Bitcoin will be included in the investment scope of its three public funds. In 2020, the U.S. MassMutual bought Bitcoin worth 100 million US dollars, while in January 2021, Tesla purchased $1.5 billion worth of Bitcoin and announced that it would accept Bitcoin as a payment for its electric automobiles.
Having said that Bitcoin can be accepted as an investment asset, let’s talk about the objection. The biggest objection refers to the one against gold becoming an investment asset. Bitcoin itself does not generate cash flow, so it cannot be valued by traditional financial methods. Assets such as stocks, bonds, and real estate all generate cash flow, including corporate free cash flow, dividends, interest, and rent. Based on these cash flows and capital costs, we can make a reasonable valuation for them and calculate their intrinsic value. However, should a bitcoin be worth 10 dollars, 10,000 dollars, or 500,000 dollars? Reasonable value seems to depend entirely on market supply and demand and sentiment. This is precisely the difference between speculation and investment: without the fundamental support, the price of assets is determined solely by market sentiment, which seems more like speculation than investment.
In 2018, the price of Bitcoin fell from around US$18,000 to only US$3,000, drop of more than 80% of its market value. In January 2021, the price of Bitcoin fell by more than 30% within a month. Have the fundamentals of Bitcoin changed so much in a month? I’m afraid not. So, why does its price fluctuate so sharply within a short period of time? It may only be explained by speculative changes in the market sentiment.
If we look back at the price changes of Bitcoin, we will find that it has not played the role of risk diversification that many people expect. For example, in the fourth quarter of 2018, global stock markets fell, and the S&P 500 index fell by about 14%. During the same period, the Bitcoin’s decline was even greater, falling by about 44%. During the first quarter of 2020, the S&P 500 index retreated about 34% due to the epidemic, while Bitcoin fell by about 38% during the same period. A good asset that can diversify risks is best kept from falling when the stock market falls, or even rising in price. However, Bitcoin does not provide such value convincingly. On the other hand, the VAST and SPC launched by NGK can diversify risks to a large extent. When Bitcoin is falling, the VAST and SPC tokens have maintained a good position and an upward trend. This shows that the VAST and SPC tokens are safe-haven assets launched by NGK even when the stock market is falling. Hence, it has the value of an inflation hedge.