As inflation returns, corporate treasurers are stuck between a rock and a hard place. Bitcoin as an alternative inflation hedge.

Corporate leaders need to rethink inflation. Over the past decade, inflation in the US dollar and the eurozone was low enough to be almost neglected. It now looks like these times are over!

The monetary supply M2, which includes currency, deposits, and shares in retail money-market mutual funds, has increased by 27% since last year. Combined with more people getting vaccinated, that could create an inflationary boom in the second half of 2021. 

To be clear, we are not predicting a 1920s-like hyperinflation scenario, but a return of moderate levels of inflation around 3%, potentially higher. If monetary policy gets out of hand, even inflation rates of above 7% like in the 1970s might be possible.

Paradigm-shift in corporate portfolio management

Even moderate levels of inflation will force corporate treasurers to rethink their cash management. A 3% inflation rate might not sound that bad until you realize that it means prices double every 20 years. After just 10 years, cash will have lost almost 30% in value.

Inflation is especially problematic for businesses that are sitting on record levels of cash. In the US, cash balances of non-financial corporations have increased to over $4 trillion, up from $2.7 trillion a decade ago and $1.6 trillion in the year 2000, according to a Flow of Funds estimate. All of this cash is set to lose value.

Cryptocurrencies might not be the first asset class that comes to mind as an inflation hedge in corporate treasury, but corporations have already started to change their opinion. The most prominent example was Tesla investing $1.5 billion in Bitcoin in February this year. CEO Elon Musk called Bitcoin a „less dumb form of liquidity than cash“ at the time.

And Bitcoin is much more than just liquidity: On the contrary to fiat currencies that are guaranteed to lose value over the coming years, Bitcoin could produce significant capital gains. The crypto market as a whole has just broken through $2 trillion in market capitalization, and banks are keeping a positive outlook.

Analysts of the US bank JP Morgan have set a long-term price target of $130,000, more than double today’s price. The investment arm of Wall Street giant BNY Mellon referred to the stock-to-flow model, which calls for a bitcoin price of $100,000, as „worth understanding.“ Both Wall Street and big corporates are turning increasingly Bitcoin-bullish.

Bitcoin volatility is declining

It’s also worth noting that Bitcoin volatility keeps declining. Massive price swings of the leading cryptocurrency have so far been the prime roadblock for conservative investors. As more liquidity flows into digital assets, prices will keep following an upward trend and also become more stable in the long term.

Capital appreciation and increased stability will make Bitcoin more attractive as a cash portfolio diversifier for corporates. JP Morgan explained there are signs that the cryptocurrency’s volatility is „normalizing“ and that the „change in the correlation structure of Bitcoin relative to traditional asset classes“ will likely increase the institutional adoption of Bitcoin. In times in which bonds don’t pay attractive returns anymore, stocks are at peak levels, and cash is guaranteed to lose value, an additional diversification pillar is more than welcome.

JP Morgan also says Bitcoin volatility might converge with gold volatility over a multi-year process. Today, the three-months realized volatility for bitcoin stands at 86%, versus just 16% for gold. Now consider if JP Morgan’s prediction comes true, and Bitcoin volatility decreases, making it more attractive for corporate portfolio managers, while the price doubles to $130,000. Wouldn’t you wish you had invested in April 2021?

Be like Elon; take a chance!

For more information about INVAO’s Managed Digital Asset Accounts, visit www.invao.org.