With an unprecedented global halt countered by an aggressive fiscal response, money supply has soared to exponential and extraordinary amounts. Investors are searching for diversification in case this new government-driven attempt results in inflation. As a result, digital currency allocations are increasingly well positioned to become a key consideration to intelligent portfolio construction. The increase in hefty government intervention and increasing market volatility have amplified the need to leave behind the cumbersome, methodical game of traditional chess for a fast-paced, forward looking game of speed chess.
That said, financial advisors would be mistaken to look too far ahead in analyzing Bitcoin’s potential. We are now in the “when,” not the “if” stage for this asset class. The key moment for this newborn asset was when it turned “one,” meaning when it surpassed $1 trillion market cap, which occurred in February and again in March. I am not sure the exact size of an asset class at which it is allocable for everyone, but I think $1 trillion should suffice.
The market capitalization is an important threshold, to be sure, and yet, as we race past this optical milestone, it’s also worth noting that we have recently seen legends, such as Stan Druckenmiller, Paul Tudor Jones, Larry Fink and Scott Minerd, all publicly share positive views of Bitcoin. Moreover, Microstrategy, Square, MassMutual and Tesla have allocated not insignificant sums into the digital currency.
All signs point toward Bitcoin being here to stay, which will force financial advisors and their firms to be positioned accordingly. In fact, I believe that the current macroeconomic regime and demographics are forcing the hands of allocators everywhere. As it relates to the former, unlimited money is being provided by elected government officials. This currency debasement story points to a 20% increase in the supply of dollars in 2020. Not surprisingly, on the back of the U.S. printing, the dollar has weakened, peaking the same day the SPX bottomed and asset inflation began.
The two great macro risks I see brewing are commodity inflation and a continuation of fiat currency printing that began in response to the financial crisis. At a time where we already have negative real rates around the globe and zero yielding cash, fiat currency debasement would be perilous. On the other hand, the asset that bottomed first and has now appreciated roughly 1000% since March 2020 is Bitcoin. Numbers like this are hard to ignore and this is true for advisors, who must have a client strategy prepared for inflation. This is especially relevant for those clients still in the accumulation stage.
As it relates to demographics, a recent report from Bitflyer, the largest crypto exchange in Japan, suggested that 60% of account holders in the U.S. and Europe are in their 20s and 30s, while only 18% are 50 and older. It is no surprise that millennials have proven to be very quick adopters; they have grown up in the computer age and feel comfortable with new technology, including digital currencies. Moreover, the major demographic benefactor of fiat asset inflation to date has been the baby boomers. Still, there is a tectonic generational wealth transfer taking place across the globe that will continue for years to come, as $60 trillion shifts from boomers to millennials through inheritance. An advisor, therefore, is only going to be fielding more questions about Bitcoin. If they are unable to provide holistic advice on how this asset fits within the broader context of a financial plan, they run the risk of their millennial clients seeking advice elsewhere while in their high earning years. That is a frightening proposition.
If you needed more evidence of push and pull dynamics demonstrating the import of Bitcoin, Fidelity launched its first bitcoin fund in August. Similarly, Grayscale recently launched an ETF providing Bitcoin exposure and saw the strategy race past $500 million AUM inside of a week. The easiest prediction I will make this year is that we will see more of these strategies introduced to the market. And this presents a unique opportunity for financial advisors who are justifiably worried about staring down the barrel of a shotgun that holds two high caliber bullets—macroeconomics and demographic changes.
2020 was a year of speed chess—a lightning-fast year with unprecedented conditions and extreme fear, leaving many advisors, institutions, and central banks in a state of confusion. Adapting to a speed chess market requires new tools and decision-making frameworks. In looking for new tools, however, it’s imperative to recognize that there are no cries for austerity as we saw in the aftermath of the financial crisis. The fight against the printing press seems to be over.
Jordi Visser is the President & Chief Investment Officer of Weiss Multi-Strategy Advisers LLC