Last week’s 13% drop in the price of bitcoin is a timely reminder of its famed volatility.
It has since regained some of that loss, putting it back within reach of its all-time high of $20 000. The cryptocurrency is up nearly 150% in 2020, defying all but the most optimistic forecasts for the year.
Read: Bitcoin rallies toward $19 000 (Nov 30)
Bitcoin accounts for barely 5% of gold’s $9 trillion market cap, which makes it a relatively tiny part of the global investment scene. But Morgan Creek Digital co-founder Anthony Pompliano recently predicted that bitcoin will surpass gold’s market cap by December 2029.
Is bitcoin a new form of money, a store of value, a payments system, or something else entirely?
It’s a question that seems to have no easy answer. “There are people trading bitcoin and other cryptos based on charts, whereas the real value comes from their usefulness. We need to start looking more at use cases rather than ticker symbols,” said Lorien Gamaroff of Centbee, a cryptocurrency payments and remittance company, speaking the Alternative Investment Conference last week.
Bitcoin’s volatility has won it a strong following among traders, but this year’s price surge appears to be driven by weighty endorsements from institutional players like PayPal, MicroStrategy and Square, all of which have bet big on a new financial architecture built around cryptocurrencies and their ability to facilitate payments at low cost, and outside of the banking system. Many of them see bitcoin’s limited issuance of 21 million coins plugging a fatal flaw in a fiat money system which has no such restraint.
Digital money is already a reality, accounting for 95% of all money in issue around the world, said VALR co-founder Farzam Ehsani. “Currencies were backed by gold until 1971, when the US dollar was taken off the gold standard. People say it is now the government backing it. [The] US government has recently been printing $1 million a second – that is not the rate of growth of the [US] economy. The crypto market cap is about $500 billion, of which bitcoin is 62%. This market cap is about 5% of gold’s market cap. It will be risky not to invest in cryptos and you will need a good reason not to invest in it. In my view bitcoin is very undervalued.”
The digital transformation swarming financial services is comparable to music when it went from analogue to digital, said Philip-Ido Vassilev Matov of blockchain company ConSensys. New uses are being discovered for blockchain technology, from loan syndication to trade credit and letters of credit, which will lead to increases in the valuation of crypto tokens. It’s already possible to collateralise real estate and other illiquid assets and transfer a portion of that wealth to others by way of digital tokens that have grown out of the blockchain.
“I think bitcoin will be more of a store of value than a currency in the future,” said Sean Sanders, CEO of crypto investment company Revix. “About 60% of people owning bitcoin are holding rather than trading [their coins]. Allocating 5% of your portfolio to cryptos has an asymmetric effect on overall performance.”
Jakob Palmstierna, head of investment solutions at crypto trading firm GSR, sees bitcoin as a potential hedge against inflation due to monetary expansion by central banks. “We’re seeing a compelling case for bitcoin on a risk-reward basis. Younger people are not really interested in gold, they’re more familiar with cryptos. We’re still in the very early stages of these trends.”
Bitcoin has solved some of gold’s investment deficiencies, such as the difficulty of storing, insuring and transporting it. Bitcoin remains risky due to its volatility, but risk is part of every investment asset, and investors are willing to take on risk if they get compensated for it, said Palmstierna. “One of [bitcoin’s] big risks is operational, but there’s been a lot of work since the last bubble in 2017 to develop technologies to bring people closer to this space.”
Sanders recommends financial advisors to start treating cryptos like any other asset class, do some research, and take a longer term view with regard to expected returns.
“Cryptos are a completely new, independent asset class. My advice is to start dabbling. Start small and give it a try. If you don’t you’re doing yourself a great disservice,” advises Ehsani.
Investors are desperately looking for new sources of return, and a bet on cryptos is a bet on the younger generation, according to Palmstierna.
Listen to Ciaran Ryan’s interview with economist Dawie Roodt of The Efficient Group: