The case for scarce assets in stimulus era

Bitcoin advocate worried about inflationary pressures and growing debt, calls for investment in scarce assets

The case for scarce assets in stimulus era

Where many analysts and investors cheered at rate cuts and stimulus packages from policymakers over the last few weeks, Elisabeth Préfontaine grew more worried.

Préfontaine is the founder of Octonomics, a research and consulting firm dedicated to understanding Bitcoin. Her worry is that rate cuts and stimulus spending will further disincentive saving through inflationary pressure and incentivize higher levels of debt with access to fast, easy cash. She thinks Bitcoin offers access to a scarce, liquid asset that won’t be subject to the inflation fiat currencies will likely see as this crisis goes on.

“If we go back to 2008, that was primarily a banking crisis and printing money worked out well because central banks could reflate the financialized asset bubble but I don’t think it’s a success because it resulted in even bigger bubbles and greater debt,” Préfontaine told WP. “Now we’re asking what tools we have to get out of that. More debt again?”

She explained that before the coronavirus outbreak, central banks were already running out of ammunition to fight the next economic downturn. Now they’ve cut their rates to, or close to, zero and injected massive liquidity into the market. The U.S. Federal reserve has effectively said they have an unlimited ability to print money, but Préfontaine believes there will be a cost to that, one felt in the form of inflation and tax hikes.

She said that our current system disincentivizes saving, holding on to money is growing increasingly expensive as interest rates drop away and inflation begins to rise. At the same time, the coronavirus pandemic has now deprived millions of the income they need to service the debt they live under.

“Before coronavirus we had populist movements from the left and the right because, among other things, people can’t afford assets anymore,” Préfontaine said. “A debt-based economy is weak and we’ve gone into the coronavirus weak and now we face unemployment like the great depression.

“That’s why Bitcoin makes sense, the supply can’t be inflated and it’s purely driven by supply and demand and, crucially, it’s not debt based. You’re comparing the value of something that’s supposedly infinite with something that is firmly scarce.”

Bitcoin experienced a drop in price as equities fell globally in early-mid March, and has begun to climb in value again akin to how broad equity markets are behaving. Préfontaine noted, though, that the rise and fall has been driven purely by supply and demand, as Bitcoin hasn’t been subject to the same stimulus that governments have offered.

She thinks that recovery is driven by investors who want access to Bitcoin’s increasingly unique combination of liquidity and scarcity. She sees other investors, like her, put off by the quantitative easing that’s typified the 11-year bull market and has only intensified recently.

She’s not advocating for a Bitcoin-only portfolio by any means. She thinks, though, that investors should look to Bitcoin for their savings and “rainy day” funds, as an asset with 24-seven liquidity removed from the central bank forces committed to printing more money and possibly driving up inflation. She stressed, though, that investors and advisors should look only at Bitcoin, not other cryptocurrencies.

“Advisors should walk slowly,” Préfontaine said. “The market infrastructure is nascent and some peripheral actors aren’t exactly good. But they should treat Bitcoin as an option on a store of value, a risk-like scarce asset attached to a 24-7 liquid market. Asset allocation should not be zero.”