Bitcoin’s value has always been volatile – in 2017 its value soared from less than $US1000 to nearly $US20,000 before collapsing to less than $US4000 a year later – but, whereas in the past that caused it to be dismissed as a quite risky vehicle for speculation, this year all forms of investment have been volatile.
This week, Bitcoin’s price hit a record $US19,850 before easing back to around $US18,950. It started this year at about $US7180 but fell 31 per cent to $US4945 as the extent of the pandemic’s threat was becoming apparent in March. Since then, it has appreciated more than 280 per cent.
In isolation that might look like Bitcoin was trading in its usual volatile fashion, with its wild gyrations attributed to the lack of liquidity and relatively small free float that has deterred conventional investors.
The markets for most investments, however, took a massive hit in March. Gold tumbled 27 per cent, the Wall Street benchmark S&P 500 plunged 31 per cent and Nasdaq was down 23 per cent. The US dollar, reflecting its traditional role as a safe haven in times of perceived risk, rose 6.3 per cent.
The simple conclusion one could draw from those price movements in March is that Bitcoin’s value was quite highly correlated to that of most other asset classes.
Since March, markets have rebounded.
Gold recovered 40 per cent and peaked in August, before falling back 12 per cent as the prospect of a successful vaccine strengthened and the perceived economic and financial risks declined. The S&P 500 has rebounded 64 per cent and the Nasdaq a dramatic 77 per cent. Bitcoin has soared 283 per cent while the dollar has slipped back 11 per cent.
While only a snapshot of the fluctuations over a relatively brief and rather unusual period, the correlations would suggest that Bitcoin is regarded as a risk asset with some specific defensive qualities. When gold faltered as the perceived risks of the pandemic receded in line with the progress of the vaccines, Bitcoin soared.
The de-linking of its price trajectory from gold and the dollar might suggest it’s just another, albeit more leveraged, risk asset – like the more stretched end of the equities markets.
A possible differentiating strand to the divergence, and the degree to which Bitcoin has outperformed, however, is that in an environment where there is no imminent threat of the inflation that tends to drive investors towards gold there is nevertheless unprecedented issuance of debt.
Some of the world’s largest investment managers and hedge funds are now advocating Bitcoin as an investment, even those once sceptical of cryptocurrencies.
The trillions of dollars of increased money supply – the US Federal Reserve Board alone has pumped more than $US3 trillion ($4.1 trillion) of newly printed dollars into the financial system – and the monetary policy settings established by the major central banks support risk assets, but debase bonds and currencies.
Bitcoin may not be generally regarded as a means of payment – although PayPal’s acceptance of it suggests that could change — but the scarcity built into its algorithms with its ultimate ceiling of 21 million Bitcoins in circulation makes it an interesting store of value.
With the market for Bitcoin now capitalised at around $US350 billion and credible exchanges to trade on, there is sufficient liquidity to make it a viable safe haven and diversifier for the larger investors that had previously shunned it.
While some of those institutional investors – including BlackRock, the world’s largest asset manager – are now quite accepting of Bitcoin, there are others who believe digital currencies’ limited use as a medium of exchange (other than for illegal activities) and the prospect of central banks issuing their own digital currencies generate question marks over its appeal and longer-term viability as an investment.
The increased acceptance of Bitcoin and the less-than-successful attempt by Facebook to create its own global digital currency have intensified central bank interest and trials of their own digital currency platforms, although they are wary of the massive disruption – the disintermediation – that would occur if a digital currency were to be issued directly from a central bank.
The desire of central banks and their governments to maintain control of payment systems and police activity within them probably means there will be either an eventual day of reckoning for existing cryptocurrencies or they – and Bitcoin is the obvious candidate – will be co-opted into the mainstream of financial systems.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.