Bitcoin, Bitcoin, Bitcoin! Bitcoin?

As we come to the end of 2020, we’ve seen a year of Bitcoin’ price rise and rise, reaching the previous $20k and surging up to $30k. So what next? Is it worth investing in Bitcoin today?

Haven’t we been here before?

The last big surge saw Bitcoin’s price peak at nearly $20k in September 2017, with speculation it would reach $50k by Christmas. Instead the price dropped off and went on to reach lows of under $3k in early 2019.

So what’s different this time?

Since its inception in 2009, Bitcoin has been a preserve of tech aficionados and outlier risk takers. What has always been required to shore up prices the legitimacy of institutional investors (i.e. pension funds, insurance companies) taking the crypto-currency seriously. Following the 2020 pandemic taking hold in March and subsequent market dip we’ve seen markets surge to new heights, where many previous rules no longer apply: typically there is a yin and yang between equities and debts, but this time their rise is correlated. In response to the pandemic governments are spending their way out of the economic turmoil the crisis has left in its wake. With low interest rates, governments can borrow and spend very cheaply, with this spending expected to result in inflation. As such, there is something of an asset grab going on: cash is being devalued. The yield to maturity on corporate bonds is around 1% across risk strata and valuations of stocks is radically out of kilter with previous norms.

Given this context, institutional money is seeking an inflation hedge and Bitcoin is seen as an asset that may hold it’s value versus fiat currency, not least as supply is finite: like gold. Whereas fiat money supply is variable and controlled by central banks, Bitcoin has a pre-defined inflation rate and therefore has utility as a store of value. Institutional investors are long-term hodlers (Bitcoin insider joke) with enormous funds to deploy. Even allocating a small percentage to Bitcoin is a big deal. Since 2017 a lot of work has been done to provide tools for institutions to hold Bitcoin safely.

Bitcoin?

If you’re going to invest in Bitcoin, the rule of thumb is less than 5% of your portfolio. One of the challenges of Bitcoin investing is there is no fundamental value in Bitcoin. Its price and therefore investing in Bitcoin, is entirely dependent on whether you think other people think its price will go up or down from today. Given institutions are now at the party and have allocations to deploy, there is a lot more support to “buy in the dips” which may limit downside. Given the limited returns available elsewhere and the inflation hedge, it is conceivable that Bitcoin may continue upwards for some time and provide a shelter if we encounter another tech stock meltdown.

Disclaimer: these are personal views. Nothing herein constitutes financial advice. Always make your own research.