It took a long time for long term and institutional investors to gain firm confidence in bitcoin. For years, many believed that it was merely a blip in the financial market- refusing to believe that the coin or the technology that it represents, would stay for long. Now, these investors have seemed to have a change of heart. Agreeing that the space has become an integral part of financial investing, they’re no longer wondering how long the coins will last, but now questioning just how far they will go.
In fact, huge names in financial investment have come out this year, declaring their interest in not only investing in the asset, but creating new software, technologies, and payment paradigms so that bitcoin can now better fit into the retail space. Clearing a path for small investors and the everyday citizen to invest in what could be the future of currency altogether. Platforms like Bitvavo are even specially designed to help new investors understand the market as a whole, while institutional investment firms declare that bitcoin is the next gold.
What Do “Hedges” Do?
A hedge, as opposed to a well-manicured vegetative boundary, is a financial term that refers to any asset that is used to protect the value of other assets against loss due to market value fluctuation. Particularly when large amounts of money are invested in assets that are closely aligned with fiat and those controlled by centralized governments.
“Hedging” or using a financial hedge is a type of risk mitigation in investing. By investing a small percentage of your liquidity into alternative investment assets- like gold, bitcoin, options, or futures. These alternative investments are usually much more stable than the other investments in a portfolio, which helps to offset any losses that may be incurred in other markets. A good hedge will hold its value and represent a stable, near zero gain investment. A great hedge will hold its value but also turn a profit.
So, What’s the Difference Between Gold and Bitcoin?
Both gold and bitcoin are often used as financial hedges- as gold has shown itself to be incredibly stable in price when viewed from a historical perspective. Which makes gold a standard “safe haven” asset, however when viewed from a shorter time scale, gold isn’t actually all that great at protecting investments against inflation. In the short term, the long term favorite performs fairly similarly to the S&P 500.
Bitcoin, while often performing in opposition to legacy markets, definitely dances to the beat of its own drum. It is also a decent protection against inflation as its value is not directly tied to centralized bank performance, or inflationary policy and practices. However, the price of bitcoin can be incredibly volatile, as the coin is famous for huge swings in valuation at seemingly any given time.
So, while these two assets have become the hedges of choice in the financial world, it’s often suggested that investors only put a small amount of their holdings in either. Or both, as a diversified portfolio is probably the best way to mitigate risk.
Why Institutional Investors Are Choosing Bitcoin
Recently it’s been seen that more and more big-time investors are looking towards crypto- and bitcoin in particular- not just as a hedge, but as an asset that can be used as both a hedge and a lucrative investment. Which in turn has encouraged massive investment firms like Fidelity and Blackrock to begin seriously considering cryptocurrency as the next best choice for hedging.
For most of bitcoin’s infancy, many institutional investors were cautious, if not downright against, using cryptocurrency as a value accruing asset. And definitely against using it as a hedge. This is largely because the crypto space was still an untrustworthy player in the space- not having near enough data to support it as having global “staying power”. But now that bitcoin has been seen to be as stable- if not more stable- than many other legacy investments, institutional investors are now coming to terms with the fact that crypto is here to stay, and may just be seen to dominate the financial space.
