While stock, oil and gold prices moved last week, one asset hit new highs for the year: Bitcoin.
The price of the digital currency rose about 90% in 2020, trading as high as $ 13,848 on Tuesday, according to CoinDesk. This is the highest level since January 2018, when Bitcoin fell from its record high of $ 19,783 the previous month.
Many investors agree that the renewed surge in interest is linked to Bitcoin’s potential as an inflation hedge.
Bitcoin proponents have touted this prospect for years, largely because the Bitcoin network has a limit on the number of units that can be created: 21 million. As the coronavirus pandemic devastates economies around the world, governments and central banks have been forced to spend trillions to prop up their economies while consuming the purchasing power of their currencies. That has revived the fear that inflation will rise in the years to come, and that fear is winning new Bitcoin converts.
Some of them are public companies. Square Inc., which enables users to purchase Bitcoin through their Cash app, bought the $ 50 million digital currency in October to use as a hedging tool in their corporate coffers.
Virginia-based software provider MicroStrategy Inc.
played a similar game earlier this year, buying roughly $ 425 million worth of bitcoins to keep in the company’s coffers. Chief Executive Officer Michael Saylor said in August that the company expects the government’s responses to the pandemic will have a negative impact on fiat currencies and sees bitcoin as a viable alternative.
Attracting new investors is a long-awaited goal for the crypto industry. Since the bubble burst in 2017, the bitcoin industry has been trying to build infrastructure for professional investors that can handle everything from exchange-traded funds to options markets and custody services.
Although the Securities and Exchange Commission has yet to approve a Bitcoin ETF, other services exist. And investors are starting to accept them.
“They had all of these institutional capital rails,” said Matthew Hougan, BitWise Asset Management’s chief investment officer. “Then you had the sharp catalyst: the response to the pandemic and inflation concerns.”
BitWise, which offers crypto-based index funds to financial advisors, hedge funds and family offices, saw its assets under management grow from around $ 70 million in June to $ 100 million on Wednesday, Hougan said.
Largest seller of crypto-based investment products, Grayscale Investments, reported $ 1 billion inflows into the trust fund products it sells over-the-counter in the third quarter, increasing its total assets under management to $ 5.9 billion. This growth has accelerated in the current period. The company said Wednesday that its assets under management had grown to $ 7.6 billion.
Options activity is also increasing. For example, at the end of 2019, the number of Bitcoin futures contracts traded on the Bakkt platform averaged around 1,300 per day. By September that average had grown to 8,700.
Bakkt, a bitcoin options market founded by Intercontinental Exchange Inc., is attracting traditional hedge funds and trading companies and, more recently, mainstream brokerage houses, said Bakkt President Adam White.
“They’re taking a close look at crypto and bitcoin,” he said.
The potential use of Bitcoin as a payment option even got a surprising boost in early October when PayPal Inc.
said it would allow users to buy and sell bitcoin directly from their digital wallets. In 2021 there are plans to expand the service to Venmo and enable the 26 million merchants who use PayPal to accept Bitcoin for payment.
These developments together have helped increase the total market value of Bitcoin from about $ 130 billion in January to about $ 255 billion.
Certainly these inflows are modest compared to the broader capital markets, where US stocks alone are worth nearly $ 52 trillion. But for the small digital currency market, it’s remarkable.
“The market just isn’t that big,” said Hougan. “Some institutions that make an allocation matter.”
The question for the Bitcoin market is to what extent these flows will continue to increase. With all the feel-good news, there are still considerable question marks.
For example, even if PayPal opens Bitcoin to merchants, Bitcoin may not be in high demand as a form of payment, especially in the U.S. That’s because the Internal Revenue Service stepped up its efforts this year to make Bitcoin not like a currency but like a security that forcing users to pay capital gains taxes on any transaction that results in a profit.
In addition, Bitcoin’s claim as a port facility or inflation protection has yet to be proven. For one, it’s only been around 11 years old, and most of the time it has been ignored by the mainstream and viewed as a curiosity for risk takers. It has no record as a broad asset class.
Plus, no matter what the central banks do, inflation just can’t get going, as it has for the past decade or so. This would undermine the use of Bitcoin as a hedging tool.
Ultimately, Bitcoin is still a risky, speculative asset, said Chris King, founder of crypto-specialty investment firm Eaglebrook Advisors, which recommends clients keep no more than 5% of their total assets in crypto.
“Don’t put in more than you can afford to lose,” he said.
Write to Paul Vigna at email@example.com
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