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After a three-year hiatus, cryptocurrencies are back and attracting the attention of investors. Will it be different this time?
Readers might remember the Bitcoin craze that sent the largest digital currency to an all-time high of $ 20,000 in 2017 and spawned numerous cryptocurrencies such as Ethereum and Litecoin. You may also remember that all of them have returned to earth and ignominy, where they languished, unloved, until this year.
This week, Bitcoin hit a new three-year high of $ 19,857. If this is new to you, there is a reason for it. After the latest buying frenzy and subsequent crash, the financial media have taken a more cautious approach to touting cryptocurrencies. Until recently, Bitcoin was barely mentioned in the press.
Another big difference is the number of new Bitcoins. More and more companies, many of them traditional financial institutions, are taking an interest in the use and trading of Bitcoin and other digital currencies such as Ethereum and Litecoin. JPMorgan Chase & Co., as well as many other Wall Street firms, have expressed more than a passing interest in owning and trading these currencies.
Furthermore, more and more companies are accepting Bitcoin as payment. As of mid-2020, more than 160 companies allow their customers to pay with Bitcoin, including big hitters like PayPal, Microsoft, AT&T, and Shopify.
And it’s not just retail investors and hot money guys who are buying and selling cryptocurrencies anymore. An increasing number of institutional investors are diving into the arena in search of better returns. Simply parking your money in a money market fund (where it makes almost nothing) is not an option for many.
In a recent notorious incident, a public business intelligence firm, MicroStrategy, announced in July a new strategy in which it would invest its substantial excess liquidity in various assets, instead of low-yielding money market funds. They chose Bitcoin as one of those alternative resources.
At the last count, the company held 38,250 Bitcoins, with an aggregate cost base of $ 425 million. Today it is worth more than 730 million dollars. As a result, many traders have used the company’s stock as a proxy for playing Bitcoin.
The share price has often followed Bitcoin’s price rather than the fortunes of the company’s core business. Other investors are identifying listed companies with any exposure to cryptocurrencies. In some cases, traders are raising their stock prices by more than 100 percent.
The same thing happened during the last round with cryptocurrencies. So why is it different this time?
Aside from the big bets that respected investors like Paul Tudor Jones, Stan Druckenmiller and other institutional players are making, the general environment has changed. Most risky assets are already at historic highs. Low interest rates provide little or no yield and, according to the Fed, will remain so for the foreseeable future. Then, there is the US dollar, which is falling like a rock, hitting lower lows most of the day.
Does this mean that cryptocurrencies are somehow a better bet than they were three years ago? No. I expect the volatility that easily halves Bitcoin in a matter of weeks to repeat tomorrow.
The digital currency markets, as they are maturing, are nowhere near stable and will not be for a long, long time. It is not a market for the faint of heart. During Thanksgiving and Black Friday, for example, Bitcoin fell more than 10% in 36 hours. Monday recovered, but you understand me.
As for me, I have added cryptocurrencies to the investments that I will now follow on a daily basis, as I believe this asset class will become more significant over time. If you can’t wait to buy, my advice is to wait for a withdrawal, which should be between $ 20,000 and $ 25,000 in Bitcoin. Except for a 20-30% drop, so wait for it!
Bill Schmick is registered as a representative investment advisor of Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401 or by emailing him at [email protected].
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