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Bitcoin is set for a few crucial weeks to determine whether its record-breaking rally this year marks a rerun of the cryptocurrency bubble that burst in 2017 or the first leg of a long-term rise.
The notoriously divisive cryptocurrency has risen more than 300% from its low of the year in March, hitting an intraday high this week of $ 19,510, with the bulls announcing the rally as a sign of renewed support from institutional investors a long term . But the next day it plummeted to 14%. On Friday afternoon in London, it was trading below $ 17,000.
The volatile changes echo the implosion of cryptocurrency prices three years ago that left the market dormant for years, and reignites the debate as to whether bitcoin is a speculative and worthless tool or the new gold, providing an alternative way to investors and hedge funds to diversify their portfolios and mitigate the risks from established asset classes.
Many doubters have already made the decision. The famous economist Nouriel Roubini said that bitcoin “has no role in the portfolios of institutional investors”, calling it a “pure speculative asset and a bubble with no fundamental value”.
But the magnitude of this year’s rally has caught the attention of investors. Wall Street bank analysts and asset managers say they are receiving more inquiries on cryptocurrencies from a wide range of clients.
Large investors like billionaire hedge fund manager Paul Tudor Jones and Stanley Druckenmiller have both approved bitcoin this year, while global payments giant PayPal announced last month that it will begin accepting cryptocurrencies. The high yields enjoyed by specialist hedge funds earlier this year added a new luster to the asset.
Bitcoin is the ten-year brainchild of an unknown individual using the pseudonym of Satoshi Nakamoto, who also created the underlying blockchain technology. It is unregulated and has no central bank backing, with hacks and fraud being common in the industry. A frenzy of interest in 2017 produced a rally above $ 19,000 in December 2017 before intraday prices fell below $ 7,000 in February the following year and just over $ 3,000 by the end of 2018.
Nikolaos Panigirtzoglou, a strategist at JPMorgan, said clues to the extent of long-term buyer support for the cryptocurrency could come from New York-based Grayscale Investments. Its bitcoin trust gives professional investors exposure to cryptocurrency movements without having to memorize the asset.
In the third quarter, more than $ 1 billion of new investments flowed into grayscale and JPMorgan said this quarter’s inflows suggest “a pace [of inflows] this is three times stronger ”.
Now, Panigirtzoglou said, the test is what happens to flows in or out of confidence in light of the latest drop in bitcoin prices and whether long-term investors are willing to look beyond short-term declines. “If we were to see outflows when the price is down, it could be a worrying development for bitcoin’s outlook,” he added.
Some investors look to bitcoin as a potential alternative to gold, an asset that tends to rise during times of inflation and turbulence in geopolitics or markets. “Since October, we have seen gold and bitcoin compete for allocations,” Panigirtzoglou said.
This development is difficult to explain. Bitcoin’s volatility is far superior to any traditional asset and a 50% drop in just 48 hours in March undermines its supposed safe haven properties. Evidence that cryptocurrencies such as bitcoin can counteract inflationary pressures in a wallet is also limited.
Large professional investors, such as wealth managers, remain wary. Ugo Lancioni, head of currency management at US wealth manager Neuberger Berman, said his team has been discussing cryptocurrencies for years, but the fund is nowhere to be found.
However, smaller family offices, which manage money on behalf of wealthy families, may be more tempted. “I don’t think asset managers will enter this space before [it is] regulated, or some major player will create their own cryptocurrency, “said Thomas Wind, former head of trading at the Swiss family office Woodman Asset Management.
But for investors like him, cryptocurrencies could act as a hedge for rates and stock markets, Wind said, adding that as a family office “you need some cryptocurrency in your portfolio.”
The Bitcoin rally does not remove doubts about the lack of regulation of the cryptocurrency and the hacks and scams associated with it. Bitcoin is unlikely to completely replace gold, but the cryptocurrency could crumble some of the metal’s share in investor holdings, analysts think.
“We may see more appropriations as we are at the beginning of the process,” said Panigirtzoglou. “And a jump from zero to a small allocation in global portfolios can still be a big deal.”
