REPORTS OF BITCOIN’S DEATH SEEM GREATLY EXAGGERATED
▶ Loose monetary policy expectations and a weak US dollar have made the largest cryptocurrency the best-performing asset class this year but investors should avoid throwing caution to the wind, writes
What can you do with a volatile and speculative asset class that has no proven enduse but refuses to do the polite thing and die? Buy it, maybe?
Even Bitcoin’s biggest sceptics may be throwing up their hands in surrender as the cryptocurrency bellwether soaks up everything the last turbulent year could throw at it, and starts climbing once again.
Those who thought – or hoped – it would be wiped out by a turbulent 2022 look set to be disappointed, again.
If a peak-to-trough crash from $68,000 to $16,000 cannot kill it off, then what can, exactly?
Incredibly, Bitcoin is now this year’s best-performing asset class, up 67.59 per cent so far and trading at a ninemonth high of about $28,000 at the time of writing.
It might be time to admit defeat and accept that Bitcoin, Ether, Dogecoin and the rest are here to stay, like it or not.
Bitcoin is still dirty, polluting, volatile and not much use, unless you are a fraudster, gangster or trafficker.
It is also a money-destruction machine for naive traders who reckon they can become rich overnight, only to waste their lives glued to an app that destroys their wealth before their very eyes.
Last year disproved the claim that Bitcoin was digital gold, a haven in times of economic trouble. It was sold off last year along with technology stocks, bonds, property, emerging markets and other key asset classes.
The end of the cheap money era, as inflation and interest rates soared, was always going to hurt more speculative assets such as this one.
It could not kill it, though. As they say, hope springs eternal and Bitcoin is swinging back into favour as investors look forward to the US Federal Reserve’s “pivot” – when it signals that the war on inflation is won and it begins to cut interest rates rather than increase them.
Trading platform eToro has registered a 78 per cent jump in newly opened Bitcoin positions over the past month, as investors wake up to the opportunity, says the site’s cryptocurrency analyst Simon Peters.
“Although inflation remains sticky, the headline numbers are coming down. As a result, we’re seeing the opposite of what we saw in 2022 and the pressure is easing off crypto.”
Now, the collapse of Silicon Valley Bank in the US and the takeover of Credit Suisse in Switzerland have given it another lift.
Cryptocurrency was a child of the 2008 global financial crisis, appearing shortly after the world’s central bankers began to debase fiat currencies by printing trillions of virtual money through quantitative easing.
But it could come of age in the latest banking meltdown, as traders anticipate that the Fed and other regulators will be forced to cut interest rates and deliver more QE to prevent systemic meltdown.
Loose monetary policy is good for cryptocurrency, says Vijay Valecha, chief market analyst at Century Financial.
“When the Fed tightens, Bitcoin tends to fall. If it eases, then crypto could rise.”
Gabriella Kusz, chief executive of the Global Digital Asset and Cryptocurrency Association, says investors are moving towards Bitcoin and other forms of cryptocurrency “as a reflection of their potential value as a hedge and alternative store of value during such times”.
Lower interest rates will boost all zero-yielding assets, including Bitcoin, gold, silver and US stocks, as investors will get a poorer return on cash and bonds, says Fawad Razaqzada, market analyst at City Index and Forex.com.
The price of gold is a menacing $2,000 an ounce again after jumping by about 10 per cent in a month, while silver and technology stocks are also up.
Mr Razaqzada says Bitcoin has faced resistance around the $28,000 mark but the Fed’s “dovish rate hike” of only 0.25 per cent at last week’s meeting helped to push it over the threshold.
“Investors are starting to price in interest rate cuts for later this year or early 2024,” Mr Razaqzada says.
Falling rate expectations have also hit the US dollar, giving Bitcoin a further boost because it is priced in the greenback, and this makes it cheaper for buyers in other currencies.
Cryptocurrency investors are renowned for their short memories and many will have forgotten that as recently as February, this sector was in crisis.
It has suffered a string of crashes over the past year, starting with Luna, a digital coin that was supposedly steady, in May, which was swiftly followed by Singapore-based cryptocurrency hedge fund Three Arrows Capital in June, platforms Celsius Network and Voyager in July, and Bitfront and BlockFi in November.
Losses topped $2 trillion and some thought Sam Bankman-Fried’s FTX scandal might be the final nail in the cryptocurrency coffin, but it has risen from the dead yet again.
Calls for effective regulation are growing louder, particularly in Europe and the UK, says Nils Bulling, head of strategic innovation at digital bank Avaloq. Some fear regulation will hit cryptocurrency but he reckons it will boost the sector rather than sink it.
“Investors still seem interested in crypto assets and currencies. This should be even more true if the investment partners are trustworthy and subject to meaningful regulation,” Mr Bulling says.
Bitcoin is what it has always been – a high-risk play on volatility. Yet the longer it survives, the harder it is to ignore.
Its lack of correlation with other asset classes – or anything, really – may ultimately turn out to be its strength.
Despite its failings, there is a growing argument for having some exposure in a balanced portfolio. If tempted, the old rules apply, so diversify by investing the majority of your invested wealth in traditional asset classes such as shares, bonds, gold, property, commodities and cash.
Resist short-term profit grabbing, overtrading, impulse buying (and selling), extreme hype, crazy forecasters and ever-present cryptocurrency fraudsters.
Never borrow money to buy it and never ever invest what you cannot afford to lose.
If you can do all that, you might find an acceptable role for Bitcoin, even if you do not understand or like it.
Bitcoin is what it has always been – a high-risk play on volatility. Yet the longer it survives, the harder it is to ignore