Bitcoin’s revival: boom or bubble?

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Bitcoin is having a moment, again. The most widely traded cryptocurrency has soared above $18,000, more than doubling since the end of 2019. Few assets have delivered such strong returns during one of the most turbulent years for financial markets.

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Bitcoin last scaled these heights in late 2017, during a boom sparked by a frenzy of buying among punters and diehard fans. The market had a “wild west” vibe during that period. The most fertile ground for commentary was often on discussion site Reddit.

When the bubble burst spectacularly in 2018, it was just about all the evidence many professional investors needed to shrug off cryptocurrencies as a market for gamblers, crooks and acolytes of Satoshi Nakamoto, bitcoin’s pseudonymous creator.

Those players are still on the scene. Bitcoin remains exceptionally volatile, and its trading is mostly driven by speculation as opposed to clear fundamentals. Many well-known exchanges suffer too often from technical glitches, withdrawal outages, opaque operating structures and lacklustre government and internal oversight.

But the market is maturing. Investors would be well served to pay attention, even if they remain on the sidelines.

Paul Tudor Jones, a billionaire hedge fund manager, said last month he had a “small” position in bitcoin, which he described as like “investing with Steve Jobs and Apple or . . . Google early”.

“You’ve got this group . . . that is dedicated to seeing bitcoin succeed in becoming a commonplace store of value and transactional to boot,” he said on CNBC television. “I’ve never had an inflation hedge where you have a kicker that you also have great intellectual capital behind it.”

Bitcoin appears to be nibbling away at gold’s place as a ballast in some portfolios, added Nikolaos Panigirtzoglou, an analyst at JPMorgan, in a research note. Gold has long been coveted by many investors who consider owning the precious metal a way of protecting against inflation.

Line chart of $ per coin showing Bitcoin soars close to its record peak

Mr Panigirtzoglou cited strong flows recently into the Grayscale bitcoin Trust at a time of flows away from ETFs tracking the precious metal as a sign that a nascent shift may be under way.

“This contrast lends support to the idea that some investors such as family offices that previously invested in gold ETFs, may be looking at bitcoin as an alternative to gold,” he said.

The Grayscale fund, which has almost $9bn in assets under management, highlights how it has become easier for money managers to gain exposure to bitcoin.

On the Chicago Mercantile Exchange, another traditional venue, the number of bitcoin futures and options contracts open has quadrupled since this time last year to more than 12,000, according to Commodity Futures Trading Commission data collated by Bloomberg.

Line chart of Open interest (000s of contracts) showing The growing market for bitcoin futures and options

Mr Panigirtzoglou noted that younger people, millennials in particular, were more likely than their older counterparts to view bitcoin as an alternative currency to be used for transactions and investment.

Adoption is likely to be bolstered further as well-known companies integrate cryptocurrencies into their businesses.

PayPal, one of the world’s biggest payments groups, last month began allowing US customers to buy, sell and hold bitcoin and other tokens in their online wallets. It plans to enable users to begin using cryptocurrencies as a funding option in transactions with millions of merchants early next year. Transactions will still be settled in traditional currencies, but it represents a step forward in easing the use of cryptocurrencies.

Square, which in October bought $50m in bitcoin to show its “potential for continued future growth”, allows users to trade the tokens through its Cash App. These developments represent a marked contrast to several years ago, when storing and using bitcoin was more complicated and riskier.

Several major central banks, including the European Central Bank, have also started seriously pondering whether to issue digital currencies. They would probably differ meaningfully from the current stable of cryptocurrencies but would provide further, official, backing for the concept.

Sceptics abound, of course, and with good reason. Ray Dalio, founder of the world’s biggest hedge fund Bridgewater, tweeted this week: “I might be missing something about bitcoin so I’d love to be corrected.”

He detailed several worries, including intense volatility, the potential for it to be outlawed and its still limited use in everyday transactions.

You could add to this list spotty regulation in many corners, severe issues that pop up frequently at crypto exchanges, and high-profile examples of fraud in the past few years.

Some of these problems, such as volatility, are likely to be here to stay, and others will take time to ease. But many are being addressed, and some investors are taking the developments in the sector seriously. For Mr Tudor Jones, at least, “this is the first inning of bitcoin”.

adam.samson@ft.com

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