With an unprecedented global deadlock countered by an aggressive fiscal reaction, the money supply has grown to exponential and extraordinary amounts. Investors are looking for diversification in case this new government attempt leads to inflation. As a result, digital currency allocations are increasingly well positioned to play a key role in smart portfolio construction. The increase in violent government intervention and the increasing volatility of the market have increased the need to leave the cumbersome, methodical game of traditional chess behind for a fast, forward-looking game of rapid chess.
However, financial advisors would be wrong if they looked too far ahead when analyzing Bitcoin’s potential. We are now in the “when” rather than the “if” stage for this asset class. The defining moment for this newborn fortune was when it became “one,” which meant it topped the $ 1 trillion market cap that happened in February and again in March. I’m not sure exactly how big an asset class is that everyone is allocable to, but I think $ 1 trillion should be enough.
While market capitalization is an important threshold, it is still worth noting that we recently saw legends like Stan Druckermiller, Paul Tudor Jones, Larry Fink, and Scott Minerd as we passed this optical milestone, publicly sharing positive views on Bitcoin. In addition, Microstrategy, Square, MassMutual and Tesla have allocated significant amounts to the digital currency.
All signs suggest that Bitcoin will stay here, which will force financial advisors and their companies to position themselves accordingly. In fact, I believe that the current macroeconomic regime and demographics are forcing the hands of allocators everywhere. Regarding the former, unlimited money is provided by elected government officials. This history of currency devaluation suggests a 20% increase in dollar supply in 2020. Unsurprisingly, the dollar weakened due to US pressure, peaking the same day the SPX bottomed and asset inflation began.
The two big macro risks I see are commodity inflation and the continuation of fiat currency pressures that began in response to the financial crisis. At a time when we already have negative real interest rates worldwide and can no longer deliver cash, a devaluation of the fiat currency would be dangerous. On the flip side, Bitcoin is the asset that was the first to bottom out and has risen around 1000% since March 2020. Numbers like these are hard to ignore, and so are advisors who need to have a client strategy prepared for inflation. This is especially true for customers who are still in the accumulation phase.
In terms of demographics, a recent report from Bitflyer, the largest crypto exchange in Japan, found that 60% of account holders in the US and Europe are between 20-30 years old, while only 18% are 50 years old and over. It’s no surprise that millennials have proven to be very quick adopters. You grew up in the computer age and are comfortable with new technologies, including digital currencies. Additionally, the baby boomers have been the main demographic benefactor of fiat asset inflation to date. Nevertheless, a tectonic generational wealth transfer is taking place worldwide that will last for years, as $ 60 trillion is inherited from boomers to millennials. A consultant will therefore only ask more questions about Bitcoin. If they are unable to provide holistic advice on how this asset fits into the broader context of a financial plan, they run the risk of their millennial clients seeking advice elsewhere in their high-income years. That’s a scary statement.
When you need more evidence of the push and pull dynamics demonstrating the import of bitcoin, Fidelity launched its first bitcoin fund in August. Similarly, Grayscale recently launched an ETF that offers bitcoin exposure and saw the strategy go beyond $ 500 million AUM within a week. The simplest prediction I’ll make this year is that we’ll bring more of these strategies to market. This is a unique opportunity for financial advisors who are rightly concerned about staring at the barrel of a shotgun with two high-profile bullets – macroeconomics and demographic change.
2020 was a year of rapid chess – a lightning-fast year of unprecedented conditions and extreme fear in which many advisors, institutions and central banks were confused. Adapting to a rapid chess market requires new tools and decision-making frameworks. When looking for new instruments, however, it is important to bear in mind that there are no austerity measures, as we saw after the financial crisis. The fight against the printing press seems to be over.
Jordi Visser is President and Chief Investment Officer of Weiss Multi-Strategy Advisers LLC