Bitcoin is set for a crucial few weeks to determine whether its record rally this year marks a resumption of the cryptocurrency bubble that burst in 2017 or the first step in a long-term ascent.
The notoriously divisive cryptocurrency has jumped more than 300% from its all-year low in March, hitting an intraday high of $ 19,510 this week, with bulls heralding the rally as a sign of renewed investor support long-term institutional. But the next day, it fell 14%. Friday afternoon in London, it was trading below $ 17,000.
The volatile changes echo the implosion in cryptocurrency prices three years ago that left the market dormant for years, and reignites the debate over whether bitcoin is a worthless speculative tool or the new gold – providing an alternative way for investors and hedge funds to diversify their portfolios and mitigate the risks of established asset classes.
The minds of many skeptics are already made. Prominent economist Nouriel Roubini said bitcoin had “no role in the portfolios of institutional investors”, calling it “pure speculative asset and a bubble with no fundamental value”.
But the magnitude of this year’s rally caught the attention of investors. Wall Street bank analysts and asset managers say they are increasingly responding to cryptocurrency inquiries to a range of clients.
Heavyweight investors such as billionaire hedge fund manager Paul Tudor Jones and Stanley Druckenmiller both approved bitcoin this year, while global payments giant PayPal announced last month that it would start accepting crypto. currencies. The high returns enjoyed by specialist hedge funds earlier this year added a new shine to assets.
Bitcoin is the ten-year-old idea of an unknown individual who uses the pseudonym Satoshi Nakamoto, who also created the underlying blockchain technology. It is unregulated and does not have the backing of any central bank, as hacks and fraud are common in the industry. A frenzy of interest in 2017 produced a rally above $ 19,000 in December 2017 before intraday prices fell to below $ 7,000 in February of the following year and to just over $ 3,000 at the end of 2018. .
Nikolaos Panigirtzoglou, strategist at JPMorgan, said clues to the extent of cryptocurrency support from long-term buyers could come from New York-based Grayscale Investments. Its confidence in Bitcoin gives professional investors exposure to cryptocurrency movements without having to store the asset.
In the third quarter, more than $ 1 billion in new investment was made in Grayscale, and JPMorgan said this quarter’s entries suggested “a pace [of inflows] it is three times stronger ”.
Now, Mr. Panigirtzoglou said, the test is what happens to trust inflows or outflows in light of the latest bitcoin price drop, and whether long-term investors are willing to look beyond it. short-term declines. “If we saw exits when the price is going down, this could be a worrying development for Bitcoin prospects,” he added.
Some investors see bitcoin as a potential alternative to gold, an asset that tends to rise during times of inflation and geopolitical or market turbulence. “Since October, we have seen gold and bitcoin compete for allocations,” said Panigirtzoglou.
This development is difficult to explain. Bitcoin’s volatility is far higher than that of any traditional asset, and a 50% drop in just 48 hours in March undermines its supposed safe haven properties. There is also limited evidence that cryptocurrencies such as bitcoin can counteract inflationary pressures in a wallet.
Large professional investors such as asset managers remain wary. Ugo Lancioni, head of currency management at US asset manager Neuberger Berman, said his team has been debating cryptocurrencies for years, but for now the fund remains on the sidelines.
Small family offices, which manage money on behalf of wealthy families, may however be more tempted. “I don’t think asset managers will enter this space before [it is] regulated, or a major player will manufacture their own cryptocurrency, ”said Thomas Wind, former head of trading at the Swiss family office Woodman Asset Management.
But for investors like him, crypto could serve as a hedge for rates and stock markets, Wind said, adding that as a family office “you need a little bit of crypto in your wallet.”
The Bitcoin rally does not eliminate doubts about the cryptocurrency’s lack of regulation and the associated hacks and scams. Bitcoin is unlikely to completely replace gold, but the cryptocurrency could reduce some of the metal’s share in investor holdings, analysts believe.
“We might see new allocations as we are at the very beginning of the process,” said Panigirtzoglou. “And going from zero to a small allocation in global portfolios can still be a big deal.”