Bitcoin is set for a crucial few 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 ascent.
The notoriously divisive cryptocurrency has surged more than 300 per cent since its low point of the year in March, hitting an all-time intraday high this week of $19,510, with bulls heralding the rally as a sign of new support from long-term institutional investors. But the following day it plunged as much as 14 per cent. On Friday afternoon in London, it was trading below $17,000.
The volatile shifts echo the implosion in cryptocurrency prices three years ago that left the market dormant for years, and rekindles the debate over whether bitcoin is a valueless, speculative tool or the new gold — providing an alternative way for investors and hedge funds to diversify their portfolios and smooth out risks from established asset classes.
Many doubters’ minds are already made up. Prominent economist Nouriel Roubini said bitcoin had “no role in institutional investors’ portfolios”, calling it a “a pure speculative asset and bubble with no fundamental value”.
But the scale of this year’s rally has caught investors’ attention. Wall Street bank analysts and asset managers say they are fielding more inquiries about cryptocurrencies from a range of clients.
Heavyweight investors such as billionaire hedge fund manager Paul Tudor Jones and Stanley Druckenmiller have both endorsed bitcoin this year, while global payments giant PayPal announced last month it would start accepting cryptocurrencies. High returns enjoyed by specialist hedge funds earlier this year have added a fresh shine to the asset.
Bitcoin is the decade-old brainchild of an unknown individual who uses the pseudonym Satoshi Nakamoto, who also created the underlying blockchain technology. It is unregulated and lacks the backing of any central bank, with hacks and fraud common in the industry. A frenzy of interest in 2017 produced a rally above $19,000 in December 2017 before intraday prices crashed to below $7,000 in February the following year and to just over $3,000 by the end of 2018.
Nikolaos Panigirtzoglou, a strategist at JPMorgan, said clues on the scale of the cryptocurrency’s support from long-term buyers could come from New York-based Grayscale Investments. Its bitcoin trust gives professional investors exposure to movements in the cryptocurrency without having to store the asset.
In the third quarter, more than $1bn of new investment flowed into Grayscale, and JPMorgan said inflows this quarter suggested “a pace [of inflows] that is three times stronger”.
Now, Mr Panigirtzoglou said, the test is what happens to flows in or out of the trust 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, that could be a worrying development for bitcoin’s prospects,” he added.
Some investors are looking at bitcoin as a potential alternative to gold, an asset that tends to rise during periods of inflation and of turmoil in geopolitics or markets. “Since October, we have seen gold and bitcoin competing for allocations,” Mr Panigirtzoglou said.
This development is hard to explain. Bitcoin’s volatility is far higher than any traditional asset, and a 50 per cent drop in just 48 hours in March undermines its supposed haven properties. Evidence that cryptocurrencies such as bitcoin can counteract inflation pressures in a portfolio is also limited.
Large professional investors such as asset managers remain wary. Ugo Lancioni, head of currency management at US asset manager Neuberger Berman, said his team had been debating cryptocurrencies for years, but for now the fund is staying away.
Smaller family offices, which manage money on behalf of wealthy families, may be more tempted, however. “I don’t think asset managers will enter this space, before [it is] regulated, or some major player will make their own cryptocurrency,” said Thomas Wind, former head of trading at Swiss family office Woodman Asset Management.
But for investors like him, crypto could act as a hedge for rates and equity markets, Mr Wind said, adding that as a family office “you need a bit of crypto in your portfolio”.
Bitcoin’s rally does not eliminate doubts about the cryptocurrency’s lack of regulation and the hacks and scams associated with it. It is unlikely that bitcoin will replace gold completely, but the cryptocurrency could chip away at some of the metal’s share in investors’ holdings, analysts think.
“We could see further allocations as we are at the very beginning of the process,” Mr Panigirtzoglou said. “And a jump from zero to a small allocation in global portfolios can still be a big deal.”