Bitcoin posted several record highs this week, with the latest being a spike at $52,847 (prices vary depending on which exchange data is being used). The gain on the year to date is about 160%, and some 636% from the levels that were prevailing a year ago. Bitcoin is essentially a digital version of a precious metal, having limited supply and no yield (unless lent out to short sellers), although with the added benefit of there being no storage costs, which in the eyes of ‘Bit fans’ makes it better than gold, albeit so far a less liquid and much more volatile version.
The 6 million ‘bitcoin’ question is: are the recent impressive gains a coming-of-age rally, or a digital version of tulip mania (as mooted by a recent FT article which was syndicated in many financial media outlets worldwide)?
Tulip mania, to recap, refers to the time back in the 17th century when the contract prices for some bulbs of the humble tulip, which had been recently introduced and were highly fashionable, reached extraordinary levels before dramatically collapsing, wiping out the fortunes of many investors.
Proponents of bitcoin and other cryptocurrencies argue that it is evolving beyond the purely speculative realm to an asset class and means of exchange worthy of the corporate world. Some are arguing that recent gains reflects its use, like gold, as being a hedge against inflation. The problem with this argument is that there is as yet no correlative evidence that this is the case. Others argue that the evolution of bitcoin has accelerated as a consequence of the pandemic and the associated rise in longer term macro economic uncertainty.
Either way, the credibility and acceptability of bitcoin was given a major boost by Tesla’s recent purchase of $1.5 bln bitcoin and its decision to accept bitcoins as a means of payment, along with the subsequent announcement by BNY Mellon to offer custodian services for cryptocurrencies. BNY Mellon, to note, is the world’s largest custodian bank and one of the three oldest banking corporations in the US (via its Bank of New York predecessor).
The global chief investment officer of Guggenheim Partners, Scott Minerd, cited by the FT, offered his theory on how high bitcoin could go. He used gold as a benchmark, and stated that given the market value of all gold globally, each bitcoin could ultimately be worth as much as $400,000. As for the counterposing tulip mania thesis, a recent UBS research note compared bitcoin to prior ill-fated digital breakthroughs, arguing that “there is little to stop a cryptocurrency’s price from going to zero when a better designed version is launched or if regulatory changes stifle sentiment.”
UBS analysts pointed to the analogy of Netscape and Myspace as “…examples of network applications that enjoyed widespread popularity but eventually disappeared.” The FT article, meanwhile, highlights doubts about bitcoin’s viability as a currency given the high transaction costs and wild volatility, which will put off most serious institutional investors and most corporate treasurers.
For now, the prevailing sentiment is positive while any ongoing lack of a correction might elicit further demand in a self-reinforcing reflexive dynamic. But if this is a bubble, precisely what might pop it is not clear. Perhaps a collapse in equity markets, which might see speculators scurrying to raise margin calls, perhaps a clamp down by regulators, or perhaps indications that regulatory scrutiny is coming. Or perhaps the adoption of bitcoin by institutional investors and corporations will ultimately disappoints.
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Andria Pichidi
Market Analyst
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