The New Billionaire Investors’ Strategy

Satoshi Nakamoto created Bitcoin as an alternative to the fiat money system, and it increasingly embraces this role. In what may be the clearest signal of the bitcoin-fiat rivalry, more billionaire investors are turning to bitcoin as a hedge. Wall Street titans Larry Fink (BlackRock), Stanley Druckenmiller (Duquesne Family Office), and Paul Tudor Jones (Tudor Investment Corporation) have recently voiced their skepticism over U.S. monetary policy. At the same time, they acknowledge bitcoin as a modern-day substitute for gold, with real potential to shield their portfolios against inflation.

Yes, inflation expectations persist, despite the official reports of a 2.4% inflation rate in September. These legendary investors warn that inflationary government policies and the escalating national debt may prolong inflation beyond current forecasts. This would make bitcoin, with its finite supply and decentralized nature, an attractive diversification asset.

Short bonds

Speaking last week at Saudi Arabia’s Future Investment Initiative, Larry Fink reaffirmed his expectations for lasting inflation. BlackRock’s CEO believes that “we have greater embedded inflation in the world than we’ve ever seen” due to the governmental inflationary policies. He added that we’re not going to see interest rates as low as forecasted, predicting only a modest 0.25% rate cut this year. Such an environment is not the best for investing in government bonds. Inflation will erode real returns, and with no sizable rate cuts, current higher-yield bonds won’t appreciate enough to outperform.

Stanley Druckenmiller takes an even more skeptical stance, openly betting against the Fed. “We shorted bonds the day the Fed cut 50 [basis points] because we thought it was a mistake,” he said in an interview with Bloomberg earlier this month. The veteran investor is known for achieving an average annual return of 30% over three decades at Duquesne Capital. He now notes that while the Fed is pushing a restrictive narrative, the market is signaling otherwise. “Equities at a record high, gold at a record high, GDP above trend, credit tight, bank earnings and forecasts look good… crypto going crazy. We don’t see any restrictions whatsoever.”

Paul Tudor Jones tackled another persistent U.S. problem: the enormous $35 trillion national debt that seems to spiral out of control. The billionaire hedge fund manager told CNBC that inflation risks loom after November’s election, as both Harris and Trump pledged to increase spending and cut taxes, worsening the debt outlook. Jones believes the only viable path forward is to inflate and grow out of the debt burden. This means maintaining low interest rates and allowing inflation to rise, “inflating away” the real value of debt. This would ease the debt burden while avoiding immediate austerity measures, notoriously difficult for any politician to implement.

From this perspective, betting against bonds looks like a wise move indeed. However, does it mean that bitcoin can truly fulfill its role as an inflation hedge?

Can bitcoin be a safe haven asset?

The “digital gold” narrative is among bitcoin’s most famous ones. Yet, it is often challenged by people arguing that such a volatile asset cannot fulfill a safe haven role. In the past, this argument used to stand. Bitcoin volatility fluctuated between 50% and 140% in 2017-2020, but has since been on a steady downward trend. Since 2023, it has been ranging from 23% to 65%, making it comparable to equities and even gold. For context, the VIX (S&P 500 volatility index) has been 16-33% in recent years. The GVZ (CBOE gold volatility index) was 10-30%. As bitcoin adoption and its market cap grow, analysts expect the coin to experience fewer dramatic price swings.

Skeptics also argue that bitcoin’s performance in past crises casts doubt on its reliability as a safe haven. At the peak of U.S. inflation in May-June 2022, when the Fed began raising rates aggressively, BTC dropped 55%. At the same time, risk-on equities of the S&P 500 fell by 15%, and the risk-off gold fell only by 6%. Market stress usually determines whether an asset is risk-on or risk-off. From this view, bitcoin has failed the test.

However, it’s important to consider factors unique to the crypto market. In May 2022, the algorithmic Terra collapsed dramatically, wiping out $50 billion in valuation. Though not directly related to bitcoin, Terra’s crash caused significant reputational and financial damage to the crypto ecosystem, triggering a wave of bankruptcies. Another bitcoin particularity is its four-year halving cycle, which also affects its price dynamics. As investors grow more discerning, bitcoin may be seen as a standalone asset, less affected by the broader crypto market’s turbulence.

Long bitcoin

Billionaire investors appear to have already grasped bitcoin’s subtleties and its potential as a hedge against inflation.

Once an outspoken skeptic, Larry Fink now believes that “bitcoin is asset class in itself,” considering it an alternative to other commodities like gold.” Thus, he thinks that the application of this form of investment will be expanded. Under Larry Fink’s guidance, BlackRock’s bitcoin spot ETF has accumulated $28 billion in assets. In the words of the firm’s Head of Digital Assets, Robbie Mitchnik, bitcoin is an “emerging global monetary alternative.” It is a “scarce, global, decentralized, non-sovereign asset” with no country-specific or counterparty risk. Mr. Mitchnik believes that these properties make bitcoin fundamentally different from risk-on assets.

Paul Tudor Jones is even more direct: “I’m long gold. I’m long bitcoin. I think commodities are so ridiculously under-owned, so I’m long commodities.”

As to Stanley Druckenmiller, he famously said in 2023: “I don’t own bitcoin, but I should.” It is unknown if the legendary investor owns any coins today. However, he did say that crypto could play a big role in a renaissance because “people just aren’t going to trust the central banks.”

Whether bitcoin can truly hedge inflation is a question only time can answer. Unlike short-term investments, inflation hedges need decades to prove their effectiveness. So far, bitcoin has beaten inflation: in the past ten years, the U.S. dollar lost 33%, while BTC gained 22,208%. Whether this continues is anyone’s guess, but it seems as if Wall Street has made its decision.