As the U.S. dollar price is rising this week, investors may be questioning where to put their money to protect themselves from the depreciation of the U.S. dollar’s buying power.
Nowadays, investors have proposed that bitcoin is a viable alternative to traditional forms of wealth storage, asserting that the cryptocurrency’s scarcity offers it the unique ability to be categorized as a type of “digital gold.”
Roche, president and global strategist at Independent Strategy, has previously backed gold as a “alternative currency,” referring to it as a safe bet for investors who are unable to earn a high yield on their savings due to ultra-low interest rates.
On Wednesday, Roche stated that a combination of bitcoin and gold would be the best way to protect the dollar and other sovereign currencies from depreciation. In terms of weighting, Roche suggested allocating about 2-3% of a portfolio to cryptocurrency and 7% to gold.
“I would own bitcoin and gold in a portfolio as a hedge against the US dollar,” he said.
According to the strategist, digital currencies such as bitcoin and ether “are going to gain investor credibility because they actually get you out of the way of central banks, politicians, and policymakers.”
“My own feeling is that they will gain a large network, credibility, and become a valuable asset to own,” he added.
Bitcoin has had a wild year, reaching a record high of nearly $65,000 in April before plummeting to around $30,000 the following month. It is currently trading at around $34,137, roughly halving its all-time high but still up more than 16 percent year to date.
Such volatility, however, is to be expected from an asset class that is still “very, very immature,” according to Roche.
“If you are not willing to accept a 30 or 40% reversal as an opportunity to invest in it, then you should not invest in it in the first place,” he added. “Currencies like bitcoin and ethereum will gain credibility and a very large network.”
Bitcoin bulls argue that the cryptocurrency can protect against inflation as central banks around the world print money to cushion the economic impact of the coronavirus crisis. According to them, this has resulted in increased purchases of bitcoin by institutional investors.
“If you consider a traditional currency… these currencies are not actually backed by central bank assets,” Roche explained. “You can no longer walk into a central bank and exchange a dollar for so much gold. That is no longer the case.”
“What is the distinction between cryptocurrency and fiat currency? The only difference is that it is backed by a central bank, which is printing so much money that you want to avoid it,” he added.
Other market participants, on the other hand, see bitcoin as a speculative bubble about to burst. Stephen Isaacs, chairman of Alvine Capital’s investment committee, told that he believes the bitcoin bubble will burst. “And when it comes to an end, it will be ugly because there will be nothing there,” he predicted.
Roche was wary of the risk of a significant drop in hot assets such as bitcoin, meme stocks, and special purpose acquisition companies if central banks begin raising interest rates again.
“I would have thought the major risk factor right now is investor overconfidence that markets will always rise because more money will be printed and more money will be spent by governments,” he said. “Of course, I believe that is incorrect. These are significant risk factors.”