Now that Bitcoin has reached $ 20,000 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 on Wednesday that One River Asset Management has established a fund company that will about $ 1 billion in Bitcoin and fellow digital currency Ether 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 went to these levels. A 1,000% surge in 2017 took its value to $ 19,000. A year later, it had dropped to less than $ 3,500.
Hedge fund managers can afford to dabble in crypto. The language that Peters used to describe the trade is the talking stuff of a macro-hedge shop, such as the “convexity” of changing trades that soar in relation to other indicators such as interest rates. That reminds someone of other wealthy investors climbing aboard the bandwagon, like 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 Robinhood crowd – retail investors who may have made out as raiders this year by trading US stocks of their sofas – should be wary of their bonfire from 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 are going to buy pizza or coffee using an exchange method that can collapse by nearly 50% in US dollar terms in a matter of days, as it did in March when the first wave of Covid-19 hit the West.
Even as payment companies like PayPal Holdings Inc. or Square Inc. striving 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% of cryptocurrency activity between mid-2019 and mid-2020, while exchanges accounted for nearly 90%.
None of this bothers the promoters of “digital gold,” which pushes the narrative that Bitcoin serves as a kind of metaphorical mattress where 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 2020 found that Treasures acted “consistently” as a safe haven, gold did so “occasionally” and Bitcoin “never did.”
The artificial scarcity behind Bitcoin – from its mining algorithm to the behavior of HODLers, who refuse to abandon their investment no matter how low it goes – helps push its price higher in boom times; it does nothing to prevent falls when whales swap. Those following in the footsteps of Peters, Howard and Jones will have to hope they are in for the long haul.
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
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Nicole Torres at [email protected]