Investment management consultant MATTHEW FEARGRIEVE asks whether the November and December highs are merely a passing peak for the notoriously volatile cryptocurrency, or whether Bitcoin is set to enter 2021 on an institutional footing as serious investors move in.
Readers of this blog will be familiar with my scepticism about Bitcoin. After the US$19,510 high of November, I found myself opining that the fundamentals were still not in place to make Bitcoin and other cryptocurrencies a safe bet. Vaccine hopes and Biden's victory in the US election seemed set to steady somewhat the markets going into 2021, diminishing Bitcoin's attractiveness as a notional "safe haven". And with all its intrinsic volatility, the high of November was uncannily evocative of the previous high of 2017 which, as we all know, was swiftly curtailed by a slump that left Bitcoin in the doldrums for years.
Bitcoin in the Underground
Until covid came along, that is. And so it was that, as I made a trip on the London Underground the other day, I saw a poster advertisement whose headline read: "Bitcoin: When you see it advertised on the Tube, you know it's time to invest". Which, if a little crude, is indeed a catchy strapline. And it got me thinking. About the trajectory of the currency, stock and bond markets over 2021, lingering covid worries and the 2020 vicissitudes of the big asset management players who have had starkly different fortunes this year. And about how Bitcoin's appeal has increased exponentially against this backdrop.
The poster also made me think about my own views about Bitcoin's viability as a long-term investment. On 28 November followers of this blog found me opining as follows:
Bitcoin is at a crossroads. Market attention will focus on how resilient Bitcoin prices prove to be in an environment of stock market buoyancy and low inflation, increased regulation and its attendant drag on performance. These conditions, if they persist, surely herald another spell in the doldrums for crypto. For this writer, the Bitcoin rally is over.
These words came back to me as I pondered the poster, waiting for my train. Are the recent highs truly the pandemic-driven, Black Swan-type, exogenous occurrences that I supposed them to be? Or do they represent a real sea-change, a quantum shift in the viability and value-longevity of Bitcoin? In November I was of the view that:
..... it is [the] scary volatility that renders Bitcoin and cryptocurrencies in general as uninvestable. Others point to it being a purely speculative, bubble asset with no intrinsic value and no regulatory overlay. The 2020 rally has not made concerns about its susceptibility to fraudsters go away. Larger asset managers remain wary. Bitcoin does not exactly enjoy a track record of being a stable store of value, and exhibits a profound tendency to fluctuate in a range that is much bigger than competing assets like gold.
So what has made me rethink Bitcoin?
Well, first, its renewed momentum. I observed in my November blog that Bitcoin climbed down from the peak of US$19,510 to around the US$16k level, in a drop-off that was unnervingly similar to the slump of 2017-18 when Bitcoin peaked at US$19,666 in December 2017 before reversing to below US$5,000 a year later. But this week, and completely against my expectations, it hit US$20,632 (£15,283) against the greenback.
This represents a value surge of more than 400% this year from a low point of around US$3,600 in March, when the coronavirus pandemic sell-offs in financial markets were in full swing.
And the way some big, institutional players are piling into Bitcoin gives me pause for thought. Many commentators agree that a major price driver for the cryptocurrency seems to be the number of institutional asset managers buying in. These players bring with them enormous expertise and capital, and this in turn fuels the interest of people like me, reading posters on the street or on a train.
Compared to 2017, when demand came from the retail market (which may well return, as my poster on the London Underground predicated), the current demand is coming from an institutional level that looks set to continue through 2021. In the space of a few months during 2020, Bitcoin's surge has seen a spike in the amount of the cryptocurrency moving into North America and East Asia, and has become popular with bigger and compliance-wary US investors.
Bitcoin's potential for resistance to inflation is another undeniable attraction. Its position relative to gold, as a bellwether of market volatility has (somewhat bizarrely) notwithstanding the historical volatility of crypto, with some serious institutional investors showing signs of treating it as something of an alternative to gold as a safe-haven asset.
Correspondingly, investor interest has been growing in Bitcoin as a way to safeguard against rising inflation. Expectations of higher rates of inflation have been growing in recent weeks, fuelled by the prospect of a stronger global economic recovery in 2021 thanks to vaccines and central bank (including Fed and ECB) stimulus packages in the US and Europe. As progress on a covid vaccine fires up the global economic recovery and stokes inflation, this may well make Bitcoin and crypto in general seem less risky to mainstream investors who have been impressed by its meteoric rise in Q4. This, too, is a dynamic that has got me thinking.
Earlier this month, US investors Cameron and Tylor Winklevoss said Bitcoin could soar above $500,000 within 10 years and surpass gold as a store of value. The twins, best known for their legal battle against Mark Zuckerberg over the founding of Facebook, suggested that Bitcoin could be "gold 2.0, that it will disrupt gold... so we think it could price one day at $500,000 of Bitcoin".
Ruffer makes a play
Ruffer, a UK-based investment management company with more than £20bn in assets under management, strategically straddles both gold and Bitcoin opportunities. Whilst Paul Kennedy manages the £1bn LF Ruffer Gold Fund, which was already doing well before covid and has since had a great 2020, the company has allocated some US$675m (£550m) to Bitcoin, in one of the biggest signals of growing demand among mainstream managers, in a move designed to diversify Ruffer’s portfolios into gold and inflation-linked bonds and to hedge some of the perceived risks in a fragile monetary system and distorted financial markets.
So what next for Bitcoin?
Followers of this blog will recall that I was also of the view that regulatory clamp-downs on the horizon could lessen investor appetite for Bitcoin. But I now have to concede that this same dynamic may well increase the cryptocurrency's investability. Some investors such as hedge funds and family offices have in the past been deterred by the opaque nature of the crypto market. But tightening oversight of the US crypto industry has certainly helped soothe some of those concerns.
It seems that public interest in cryptocurrencies will be reignited over the Christmas period, as people start to believe in Bitcoin all over again. The covid-19 pandemic has almost certainly contributed to the rebound in Bitcoin. It has changed the order of things and that resonates with many investors right now. And it may be expected that the resurgence of Bitcoin will (once again) place central banks and financial regulators on red alert. Ayush Ansal, CEO of hedge fund Crimson Black Capital opines: "If they become truly mainstream, Bitcoin and other cryptocurrencies represent an existential threat to the entire banking system".
Am I right to still have reservations about Bitcoin?
My previous, Bitcoin-sceptical blog (here) pointed to the 2017 high, and then the big slump that followed. I also have a natural conservative streak that comes out when I see hot money pouring into something. Some of the biggest investors in the world have been singing Bitcoin's praises in recent weeks. This suggests they already own bitcoin and are hoping to encourage more people to buy and boost the price upwards. And this is the problem I have with the advertisement I saw on the London Underground. Small investors like me, when reading advertisements on the metro, would do well to remember that the big guys always hype a product that they want to shift at inflated prices to the retail public.
But, having concluded my blog in November by saying that I thought the Bitcoin rally was over, I now have to revise that view. I have curbed some, but not all, of my Bitcoin scepticism. The test for Bitcoin - of rather, for the nerve of those institutional players who are backing it right now - is how far mainstream asset valuations and stock market volatility stabilises over 2021. And that's before you factor in recession and unemployment as dampeners on the little guy's appetite for betting on Bitcoin.
Matthew Feargrieve is an investment management consultant. You can read his blog here and see his Twitter feed here.
