Bitcoin is a ‘critical hedge’ against currency debasement and return of inflation, Jefferies says

Published Thu, Oct 5 20233:00 PM EDTUpdated Thu, Oct 5 20233:48 PM EDT

Bitcoin and gold are "critical hedges" against the potential for monetary policy that reduces the value of currency, as well as the return of inflation, Jefferies says. Although investors have "effectively given up" on the U.S. recession forecast, macro signals are still suggesting a coming downturn in the U.S., and monetary tightening will work with a bigger-than-usual lag this cycle due to an explosion of money supply growth dating back to 2020, the firm said in a note to investors Wednesday. "G7 central banks, including most importantly the Federal Reserve, will not be able to exit from unconventional monetary policy in a benign manner and will ultimately remain committed to ongoing central bank balance-sheet expansion in one form or another," said Christopher Wood, global head of equity strategy at Jefferies. "Such a failure to exit from unorthodox monetary policy in a benign manner is likely to culminate in the collapse of the U.S.-dollar paper standard to the benefit of both gold bullion owners and also owners of bitcoin," he added. Wood emphasized that investments in both bitcoin and gold should be viewed by investors as insurance rather than short-term trades. Bitcoin's narrative as an insurance policy against financial system instability gained momentum this year in the wake of the regional banking crisis in the U.S. Several institutions, including Signature Bank, Silicon Valley Bank and First Republic Bank suffered earlier this year as customers lost confidence in their stability and withdrew their funds in panic. Jefferies recommends a 10% allocation to bitcoin for U.S. dollar-based long-term global investors, such as pension funds. Alongside physical gold and unhedged gold mining stocks and Asia equities, Jefferies has added bitcoin to this global portfolio in the past couple of years. The firm made this move "on the view that bitcoin has now become investible for institutions, with custodian arrangements in place for digital assets, and represents an alternative store of value to gold," Jefferies said. This year, the firm introduced a global long-only equity portfolio that includes a 3% weighing in the Grayscale Bitcoin Trust (GBTC) . — CNBC's Michael Bloom contributed reporting.