In Asia and Europe, stock markets were selling off at the start of the last week in February, after a rise in reported cases of coronavirus in Korea, Italy and Iran.
Investors fled to classic risk-off trades, with the yield on 10-year US Treasury notes falling below 1.4%.
What has been the best place for an investor to put their money so far, this year?
Amid the spread of coronavirus, concerns about slowing global economic growth and simmering trade tensions, the US stock markets had still performed strongly from the start of 2020 to mid-February.
By Wednesday, the tech-heavy Nasdaq had risen 8.5%, with the S&P 500 up 4.3%. Other national stock markets had done well, too: Australia up 6.9% and Italy up 7.3%.
Bonds haven’t returned quite so much, though UK gilts managed to put on 3% in the same period, with the Barclays Bloomberg US government/credit bond index up 2.5%.
Gold had climbed 6.22% year to date, with brokers reporting that financial professionals have been prominent buyers, presumably worrying about the coming effect of coronavirus on financial markets, especially equities. As February drew to a close, that correction looked like it might be unfolding.
Previous halving events have seen some of the larger participants hold off on releasing bitcoin into the market in anticipation of a rise into the event. We believe this same dynamic is currently in play
– Gavin Smith, Panxora
But the best performing financial market, if you can call it that, has been something quite separate.
The leading cryptocurrency – not so much a currency as a speculative investment, but one in which conventional institutional investors are once again showing interest – has put on 38% so far this year, rising from $7,200 at the start of January, hitting $10,400 on February 13, before settling back to $9,920 on Monday.
There are three explanations for this.
Crypto nerds, like their cousins claiming to spot technical patterns driving mainstream financial markets, have pet theories around stock and flow: the limited flow of bitcoin into general circulation relative to the high stock held tight by the bitcoin billionaires.
They also point to the reduction in mining rewards due in May, the so-called halving. Past reductions in mining rewards have had price impact.
Gavin Smith, CEO of Panxora, a group that runs a cryptocurrency hedge fund, says: “Bitcoin started rising during the market sell-off triggered by coronavirus. That was just the short-term catalyst – the underlying driver is the bitcoin halving event in May. Previous halving events have seen some of the larger participants hold off on releasing bitcoin into the market in anticipation of a rise into the event.
“We believe this same dynamic is currently in play.”
That’s the bottom-up micro view on what’s driving the crypto markets higher. There is a macro view as well.
This holds that the recent discussions spilling out from leading central banks over launching new digital versions of their own fiat currencies has given a new validity to crypto.
Simon Peters, analyst at multi-asset investment platform eToro, says: “It looks like the US authorities are finally taking bitcoin and its peers seriously.”
He points to the value of BTC hitting its recent high after the latest testimony before Congress from the Federal Reserve on monetary policy.
“While president Trump has pledged to use the Secret Service to stamp out cryptoasset crime as part of his $4.8 billion budget proposal, chairman of the Federal Reserve Jerome Powell admitted the Fed was seriously investing in the country’s response to the growth of cryptoassets, including the possibility of a Fedcoin, an official stablecoin,” says Peters.
The Fed is not alone. Central banks around the world are now going beyond research into testing digital currency and even live pilot projects.
Meltem Demirors, chief strategy officer at digital asset manager CoinShares, tells Euromoney: “When I first got involved with bitcoin in 2015, you had no idea who you were dealing with. All you needed was a bitcoin wallet and a private key, and you could trade peer-to-peer, with no intermediaries, in a borderless market that defied regulation.
“That showed what was possible. The financial world as we know it is now changing. Central banks will digitize the money supply.”
She adds: “In the last month, I have had more inbound queries about bitcoin from investors than I have known before, because this whole conversation around central bank digital currencies is making them curious.”
Between the top-down view on the growth of official sector digital currency and the micro take on the great halving, the pragmatic explanation is that bitcoin is suggesting itself for the first time as an investment with institutional-grade infrastructure around it – exchange-traded products from regulated organizations, custody from providers as trusted as Fidelity, higher daily turnover and greater price transparency.
This offers something investors need: the potential for high returns seemingly uncorrelated to conventional financial markets and coming with less volatility than in preceding years.
We have been here before, of course. At the start of 2017, the dollar price of one bitcoin was $1,025. By the end of that year it had hit $20,000, and hedge funds, family offices and even mainstream institutional fund managers wanted in.
Then it crashed in 2018, all the way back down to $3,125 by the end of that year. Bitcoin recovered in the middle of 2019 to as high as $11,900. For the past seven months, it has traded between that peak and a low of $6,800 in mid-December.
It’s not what you’d call range bound.
And the suspicion persists that the market is open to manipulation by its so-called whales, the pseudo anonymous bitcoin billionaires minted early in its rise. But this is now an asset in which trading passed $10 billion a day at the start of February and has hit more than $40 billion in 24-hour periods at times through the month.
The phrase “institutional investor” is bandied around rather too freely in bitcoin land. Specialist hedge funds and family offices are definitely in, so too some diversified macro hedge funds, but managers of pension fund money and mutual funds with fiduciary responsibility to retail clients, not so much.
Usually, large institutional investors get the first look at any new market or investment. One of the unusual things about bitcoin is that retail got the first look. Large institutional fund managers operate with mandates restricting them to specific assets, geographies and exchanges, and most will not have been keen to appeal to change these and go into something new and unregulated.
That may be changing now that, for example, Fidelity offers enterprise-quality custody and trade execution services for digital assets to investors such as hedge funds, family offices and market intermediaries in the US and Europe.
And investment vehicles familiar to conventional investor but engineered for bitcoin, such as tracker funds from regulated asset managers that combine institutional-grade custody and full insurance, are now appearing.