Bitcoin came into existence in 2009, as a brain child of a person or group of persons under the pseudonym of Satoshi Nakamoto. The original premise of bitcoin was to become a peer-to-peer electronic cash that could disrupt some existing fiat currencies. For example, if I buy wine from Chile, I effectively instruct my Indian bank to pay the retailer's Chilean bank. This involves paying fees to both banks, correspondent banks etc., and facing an FX (foreign exchange) rate that is likely to be exorbitant, and an entire transaction that takes at least a few working days to process. Imagine if you could make this transfer almost instantly and by paying no fees to banks and other intermediaries, effectively disintermediating them and the associated central banks? That was the perceived original vision for bitcoin.

While we have seen adoption and velocity of bitcoin and other cryptocurrencies steadily increasing (from a small base), the asset has also found itself being regarded as a potential long term store of value. A store of value implies an asset that at least retains its value (and therefore your investment) especially in recessionary markets. Gold has been widely accepted as a store of value and it proved itself during and after the 2008 financial crisis when it went up by over 200 percent while most equity, fixed income, currency, commodity and real estate markets simultaneously collapsed.

Bitcoin -- the next inflationary hedge?

Similar to gold, bitcoin has fixed limited supply, and this is crucial as bitcoin's supply cannot be unilaterally changed by any central bank. If a recession occurs tomorrow (many analysts are calling global recession in the next 12-18 months) then it is likely most central banks will print even more fiat money to try and increase lending and growth, thereby reducing the currency's value in an over-supplied environment. A store of value with fixed limited supply will most likely gain in such a scenario as people flock to such assets thereby increasing demand, and simultaneous weakening of the fiat currency in which they are priced.

Bottom line: If you were not investing in bitcoin because you don't think it will ever replace existing fiat currencies, then please be aware that the alternate utility of a store of value could yet result in bitcoin's price increasing at a faster pace than most (all?) traditional assets.

Of course, all of this will need to be regulated and eventually operated in a compliant framework with much more adoption, and I have already covered how this is gathering pace and we, India, are getting left behind in my earlier article.

Note: Please note that this article does not constitute as investment advice. This is purely educational content.

Prashanth Swaminathan is an alumnus from IIT Guwahati and IIM Calcutta, who spent 10 years in investment banking at Morgan Stanley London before setting up an EU cryptocurrency exchange, XDAT.

First Published:Jul 19, 2019 6:00 AM IST