Is Bitcoin's boom just beginning?

Cryptocurrencies are gaining in prominence but remain highly volatile

Bitcoin has almost trebled in value since the start of the year, having broken through the $20,000 barrier on Wednesday. Reuters

As Bitcoin surged through the $20,000 mark for the first time last week, the chief investment officer of New York-based money manager Guggenheim Partners, appeared on Bloomberg TV to make a startling claim – it should be worth 20 times' that.

Scott Minerd, who heads investment policy for a firm with more than $295 billion of assets under management, said the firm’s interest in Bitcoin had been fuelled by the US Federal Reserve's “rampant money printing that is going on” as it uses monetary stimulus to cushion and offset the economic shocks of Covid-19.

“We made a decision to start allocating towards Bitcoin when Bitcoin was at $10,000. It’s a little more challenging with the current price," Mr Minerd said. "But having said that, our fundamental work says that Bitcoin should be worth about $400,000”.

Bitcoin has more than trebled in value since the start of the year, trading at $23,570.46 at 1.13pm on Monday, giving the world’s most popular cryptocurrency a market capitalisation of $440 billion.

New-found enthusiasm among institutional investors has been cited by enthusiasts as one of the reasons as to why this year's boom in Bitcoin is different. The cryptocurrency's previous spike in 2017 was led by retail investors, who were then burned as it subsequently lost 80 per cent of its value within 12 months, slumping from just below $20,000 to $3,200 over the next 12 months.

"The recent bull run has certainly got people talking, but relatively to 2017 public attention has been relatively muted," Marcus Swanepoel, chief executive of London-based cryptocurrency asset exchange Luno, told The National.

“2020 was the year of institutional investment, with MicroStrategy, Mode, Square and more moving huge percentages of their cash reserves in Bitcoin in a bid to move away from the ‘melting iceberg’ that is fiat currency,” he added.

“I think if you look at the whole cycle, 2017 was the hype,” Charles-Henry Monchau, chief investment officer of Geneva-based online bank Flowbank, said.

“The base was not there. The technology was not there, the regulation was not there, the use was not there,” Mr Monchau, who has previously served as chief investment officer at Dubai’s Al Mal Capital and Shuaa Capital, added.

He cited the decision by US-based Fidelity Investments, which has $3.3 trillion of assets under management, to launch a Bitcoin fund for wealthy clients, as a sign of its growing prominence among asset managers.

"Many asset managers are not paid for being brave. They are paid for avoiding disaster. And I think that given the fact that it’s still volatile, they prefer not to be seen as idiots in front of an investment committee," Mr Monchau said.

Bitcoin's adoption as a medium of exchange by digital payment companies like Square and PayPal is a sign that it is being used more frequently, he added.

Still, for economist Nouriel Roubini, professor of economics at New York University's Stern School of Business and one of crypto's fiercest critics Bitcoin "doesn't have any fundamental value", he said on Bloomberg TV.

"Calling them cryptocurrencies is a misnomer ... to be a currency it has to be a unit of account, a scalable means of payment and a stable store of value. On all of these counts neither Bitcoin or any other cryptocurrency is a currency," Mr Roubini said. "Second, there is plenty of academic evidence suggesting that the price of Bitcoin has been manipulated ... and it doesn't have any intrinsic value."

In spite of this scepticism, the number of trials being conducted by central banks around the world to create their own digital currencies could prove to be the “Trojan horse” that fuels the growth of crypto assets, Mr Monchau said, as banks would be forced to adopt the digital wallets and other infrastructure required to process these.

“Just creating all of the infrastructure and systems would be enabling Bitcoin and the main cryptocurrencies to be more easily adopted by customers,” he said.

Mary Rich, vice president of Goldman Sachs Asset Management’s investment strategy group isn't so sure. She says central bank disruption represents the biggest threat to cryptocurrencies.

"Several central banks are exploring their own digital currencies and we think that once those are unveiled, they'll provide much more compelling alternatives to the current crypto ecosystem," she said in a video on the company's website.

Then there is the question of regulation. The fact that cryptocurrencies exist outside formal banking networks is seen as a benefit by enthusiasts, who see it fulfilling a similar role to gold in terms of being a store of value in an era of unprecedented monetary easing by central banks. Some 30 per cent of all of the US dollars issued in history have been printed this year, Mr Monchau said.

The lack of oversight makes it popular for criminals. An Oxford University study last year found that about a quarter of all Bitcoin users were involved in illegal activities and about 46 per cent of all transactions, involved the currency being used for illicit transactions.

On Friday, the US government's Financial Crimes Enforcement Network, FinCEN, said it would require banks and money service businesses to "verify the identity of customers in relation to transactions involving convertible virtual currency or digital assets with legal tender status".

Earlier this month, the US Treasury Department said Treasury Secretary Steven Mnuchin held discussions with G7 finance ministers and central bank governors on "the evolving landscape of crypto assets and other digital assets and national authorities' work to prevent their use for malign purposes and illicit activities".

“There is strong support across the G7 on the need to regulate digital currencies,” it said.

JP Morgan's chief executive Jamie Dimon also reiterated his view at a New York Times Dealbook online conference last month that Bitcoin will eventually be regulated.

“We’re a believer in cryptocurrency properly regulated and properly backed. Bitcoin’s kind-of different and that’s not my cup of tea,” Mr Dimon, who run America's largest bank, said.

“My experience with the government is they can regulate whatever they want when they feel like it. If it [Bitcoin] gets bigger and bigger, it will be regulated,” he added.

If regulation were introduced, it might not kill off Bitcoin, but it could significantly diminish its appeal.

“Regulatory changes can strongly influence the demand for decentralised coins,” Michael Bolliger, chief investment officer for Swiss bank UBS, said.

Investors concerned about the debasement of fiat currencies would be better off putting their money elsewhere, he said.

“Over the years, Bitcoin and other cryptocurrencies have substantially outperformed many other assets. However, their high volatility and large drawdowns cast serious doubt on their suitability as a safe-haven asset,” he said. Annualised Bitcoin volatility stood at about 80 per cent as of December 20, according to a monthly volatility index created by the Bitmex exchange.

“For investors looking for a defensive tilt to their asset allocation, we currently recommend gold as a safe-haven asset.”

Arguments about Bitcoin have ranged from detractors labelling it as a fraud that will disappear within a couple of years to supporters predicting it will become the dominant world currency, neither of which is likely said Mohamed El-Erian, the president of Queens’ College at the University of Cambridge and chief economic adviser to Allianz, on a webinar organised by the AIM Summit last week.

Mr El-Erian recently bought some Bitcoin when it fell to about $4,000 and then sold at $19,000, but said his decision was based purely on technical analysis.

"When an asset class is establishing itself, it overshoots on both sides. And Bitcoins are still establishing themselves," he said.

"Central banks will have very mixed feelings towards them," Mr El-Erian said, adding that they will be keen to understand the underlying technology and how the use of Bitcoin evolves.

"But they will be very, very careful that it doesn't become a broadly accepted currency because currencies are an element of economic control that central banks will not give up very easily."