Many investments have gone solo recently, but none stand out much like Bitcoin. Its price increased fourfold in just a few months to touch an all-time high of more than $ 41,900 in early January, driving the cryptocurrency back to the fore less than three years after a spectacular 75% crash. (It traded at about $ 36,400 on Jan. 19.)
Nothing about Bitcoin fundamentals has changed. Bitcoin is just a piece of digital code that generates no returns, pays no dividend or interest, and has nothing but other people’s belief that it might be worth something.
One big thing that has happened is that some on Wall Street have joined the crypto believers club. Hedge fund manager Paul Tudor Jones helped kick off the frenzy when he said in May that he was buying Bitcoin like a hedge against the inflation it sees coming from the aggressive actions of policy makers to keep the economy alive in the coronary virus pandemic. (The idea is that Bitcoin could be safe from inflation, because it was designed to have limited supply.) His announcement was followed by announcements by other prominent investors, including Stan Druckenmiller.
“When you have a few quarters of people delivering good returns and saying, ‘Oh, that’s because I have Bitcoin in my portfolio,’ we’re starting to see evidence of it, then I think the pressure will be. ‘ n warming up to be adding Bitcoin, ”said James Butterfill, investment strategist at digital asset manager CoinShares.
Funds investing in cryptocurrencies have thrived in recent months. A popular trust Grayscale took in $ 4.7 billion in 2020, more than nearly 99% of the US-listed exchange trading products, according to Bloomberg Intelligence. Loyalty Investments introducing a Bitcoin fund for wealthy investors. And Bitwise Asset Management, a provider of crypto index funds, recently surpassed $ 500 million in managed assets, a fivefold increase since late October.
Whether the inflation that Bitcoin investors are worried about is a big question – consumer price rises have been muted for years, despite more than a decade of underlying interest rates. Another question is whether an asset that often experiences steep decline will prove to be a reliable store of value. Bitcoin is still a relatively thinly traded asset, and it can a handful of large holders called whales. While platforms like Robinhood and PayPal make it easier for individuals to use and trade Bitcoin, about 2% of anonymous accounts that can be traced on digital ledgers own 95% of the tickets, according to researcher Flipside Crypto.
Wall Streeters’ interest in Bitcoin may say as much about their professional motivations as the investment case. Cryptos can look like an opportunity, albeit a risky one, to generate some external returns in a world where opportunities seem limited. “It’s just a ton of money looking for somewhere to invest and not wanting to invest more in really negative yields and ever-higher equity markets that seem to be approaching pricing limits,” said Chris Gaffney, world president. markets at TIAA Bank.
Asset managers, and especially hedge fund impresarios known as macro traders, need to stand out from their peers. “You wonder how these macro players look at the world, and they all have a different edge, but importantly, they are trying to find out what is going to hold the item largest share of thinking, largest share of wallets, and largest momentum of the entire world, ”said Catherine Coley, chief operating officer of crypto trading platform US Binance. Coley thinks this can last a while. “At the current levels, the minimum number of people we are going to see is being invested in this,” he said. “Starting tomorrow there will be more; starting the next day there will be more. ”
There is a domino effect, says Gaffney, when a handful of institutional investors move into a market that then sees a tremendous runoff. Others are starting to take an interest because it can be too risky – for their careers – not to buy at least a little. “So, ‘Oh my goodness, my competitors and the people I’m going to be compared to are invested, and they’ve beat me to it’ – if you will – it’s better for me get investment as well, ” he said. “That creates momentum in investment – and especially investment that has a relatively small market and not the usual liquidity figures.” The hard thing about momentum, like Bitcoin’s past accidents have shown, is that the pendulum can swing the other way very quickly.