NEW YORK (BLOOMBERG) – Now that bitcoin has reached US $ 20,000 (S $ 26,550) for the first time, should you move your hard-earned cash to digital currency? History suggests that caution should be your motto, no matter how strong the fear of missing out may be.
News last Wednesday that One River Asset Management has established a fund company that will have about US $ 1 billion in bitcoin and co-ether digital coins by early next year suggests that institutional investors are starting to take cryptocurrencies more seriously .
There is obviously serious money involved. CEO Eric Peters told our Bloomberg News colleague Erik Schatzker that billionaire hedge fund manager Alan Howard is buying a stake in the new business, called One River Digital Asset Management.
But before you race to open a digital wallet, look back to what happened to bitcoin the last time it approached these levels. A 1,000 percent surge in 2017 took its value to US $ 19,000. A year later, it had dropped to less than US $ 3,500.
Hedge fund managers can afford to dabble in crypto. The language that Mr. Peters used to describe the trade is the talking stuff of a macro-hedge shop, such as the “convexity” of volatile trades that soar relative to other indicators like interest rates. That reminds someone of other wealthy investors climbing aboard the bandwagon, like Mr Paul Tudor Jones, who compared bitcoin to “investing in Google early”.
Even if they are burned on a big bet, it’s money they won’t lose.
But the Robinhood crowd – retail investors who may have made out as raiders this year by trading stocks of their sofas – should be wary of a bonfire of their vanity. While bitcoin is great as a billionaire speculative, it is hardly a useful digital currency or a safe haven investment for the average punter. Few people go to buy pizza or coffee using an exchange method that can collapse by nearly 50 percent in US dollar terms in a matter of days, as it did in March when the first wave of Covid-19 hit to the West.
Even as payments companies like PayPal or Square strive to bring bitcoin trading to the masses, very few traders touch the stuff directly. Data from Chainalysis estimates that traders in North America accounted for only about 1 percent of cryptocurrency activity between mid-2019 and mid-2020, while exchanges accounted for nearly 90 percent.
None of this is bothering “digital gold” promoters, who push the narrative that bitcoin serves as some kind of metaphorical mattress that everyone should stuff dollars or euros quickly.
But how safe is this safe haven? A study by the Kansas City Fed comparing bonds, gold and bitcoin between 1995 and February this year found that Treasures acted “consistently” as a safe haven, gold did so “occasionally” and bitcoin “never did.” The artificial scarcity underlying bitcoin – from its mining algorithm to the behavior of HODLers, which refuses to abandon their investment no matter how low it goes – helps push its price higher in the boom times; it does nothing to prevent falls when whales swap. Those who follow in the footsteps of Mr Peters, Mr Howard and Mr Jones will have to hope that they are in for the long haul.
• Mark Gilbert is a Bloomberg Opinion columnist involved in asset management. He is also the author of Complicit: How Greed And Collusion Made The Credit Crisis Unstoppable. Lionel Laurent is a Bloomberg Opinion columnist covering the European Union and France.