Mining profits

Perhaps bitcoin is the saviour your portfolio seeks to combat inflation

INFLATION IS UPON us globally. In Canada, the current print of 4.1% hasn’t been seen since 2003. Central bankers have fanned the flames with their incredible increase in money supply during the past 20 months. This is in addition to the huge deficits that governments ran in order to fund their pandemic lockdowns of the economy. The recent debt-togross-domestic-product numbers from the International Monetary Fund show Canada (352%) in a virtual tie with Greece (343%), only slightly trailing Japan (433%), and leading many other developed nations such as the United States (281%) and Germany (200%).

This is a catastrophe, to put it mildly. Who will be responsible for servicing this debt? Can the debt be serviced if interest rates increase? Is creating significant inflation the only way forward so that this debt shrinks as a percentage of GDP? Maybe governments will finally be able to get blood from a stone by increasing tax rates?

At the same time, we have an entire generation not wishing to work in skilled trades. Birthrates in the western world have been on a decline for the past five decades, with the average couple having 1.5 children. Added to this, workers are deciding not to go back to the office after not having to endure the hassles of commuting for more than a year. Resignations are in record numbers. Correspondingly, many employers have increased their pay with some minimum-wage jobs doubling rates due to these market constraints. One thing is for sure, wages tend to be sticky, and it is very likely these new pay levels will last.

Interest rates are still at generational lows of the past 40 years, but how long can that last? Over the past couple of years, the smart money has flocked to growth stocks (due to their long duration) along with residential real estate and digital assets. Bitcoin, now the leader in market cap, rose to $70,000 recently from less than $10,000 in the spring of 2020.

Given all that, it’s no wonder investors are wondering how to hold on to their returns and trying to protect their portfolios after inflation. We are starting to see some secular trends emerge over these past 20 months that will likely persist over the next decade. Capital, both financial and human, has been flowing away from certain jurisdictions, with the ability to work remotely only compounding this change.

Countries such as the Cayman Islands, Bahamas and Barbados have proven popular over the years for the financial elite, while U.S. states like Florida, Texas, Tennessee and Wyoming are attracting capital from Canada, New York, Illinois, New Jersey, Connecticut and California due to their low-income tax rates and the upholding of each individual’s rights and freedoms.

These states are filling with the millennial generation, who are passionate to disrupt the status quo and have dedicated their talents to this end.

Areas such as digital assets with secondary payment layers such as the Lightning network, which is an overlay to the Bitcoin network, allow companies like Square Inc. to potentially process transactions thousands of times faster than traditional payment networks controlled by the banks, Visa Inc. and Mastercard Inc. El Salvador, which made bitcoin legal tender recently, has the ability to reduce transfer fees by Western Union Co. by almost US$400 million annually.

Millennials and even gen-xers love their e-sports. The e-sport market expects 26.6 million viewers in the U.S. this year with an increase to 31 million viewers estimated for 2023. The Big 10 universities in the U.S. are offering full science, technology, engineering and mathematics (STEM) scholarships to e-sports athletes who compete for their schools. Economically, this is a force to be reckoned with, since expenditures are in the billions of dollars each year and growing quickly. In addition to the investment opportunities, students are finding lucrative careers in this sector

Environmental, social and corporate governance (ESG) and green investing strategies are viewed by institutional investors as important, but the surprise will likely come from energy producers and even countries that have excess energy but no way to export it profitably. The challenge of transporting electricity has always been the power losses over long distances. These energy producers may utilize hydro, flared natural gas, solar, wind or even volcanoes to generate electricity,

which can be used to power application-specific integrated circuit (ASIC) bitcoin miners. From there, bitcoin, which is a digital store of energy, may be sent anywhere in the world by the internet, satellite or even ham radio without significant transmission costs or infrastructure.

In essence, bitcoin mining will be a way to increase the efficiency of many power-generation stations, subsidize renewables and/ or provide a much-needed source of exports to poorer countries that previously could not export energy. At this very moment, the second-richest man in Norway is funding a large wind project in the North Sea while El Salvador is creating power generation from the unlimited thermal heat from its volcanoes. Over the next decade, so-called have-not countries could become part of the haves. The ways to participate in this could either be done via bitcoin miners (public or private), or simply owning the bitcoin token.

Arthur Salzer is CEO and chief investment officer at Northland Wealth Management.