A surprise ‘safe-haven’ investment has surged 180% since March
What’s driving the bitcoin spike? Experts say much of it is due to the weakness in the US dollar. The dollar has plunged in recent months on expectations that the Federal Reserve will keep interest rates near zero for years as a result of the financial disruption from the Covid-19 pandemic.
“It’s a flight to safety,” said James Putra, head of product strategy for TradeStation Crypto.
Of course, safety is a relative term these days. Investors may think that bitcoin is a good hedge against a falling dollar. But the virtual currency remains exceedingly volatile.
Bitcoin’s intense swings could scare away some investors
Putra conceded that concerns about bitcoin hacks and security could make mass adoption of the cryptocurrency a difficult proposition for average consumers and investors. For example, a recent Twitter hack made it look like Elon Musk, Bill Gates, Joe Biden, Kim Kardashian West and other verified accounts were promoting a cryptocurrency scam.
That’s why some experts aren’t convinced that bitcoin prices will keep climbing back toward their late 2017 record highs of near $20,000.
At some point, institutional investors (think hedge funds and other big money management firms) might cash in some of their bitcoin chips to take advantage of what Nick Cowan, CEO of GSX Group, dubbed an “obscene” rally since bitcoin bottomed in March.
“There is a herd who is in love with bitcoin that keeps pushing it higher. But is the smart money going to take a walk again?” Cowan said, noting that big institutions dumped bitcoin (along with many other assets) during the height of coronavirus fears earlier this year.
Still, Cowan conceded that the upward trend is the friend of bitcoin traders.
That may mean the bitcoin rally has legs after all — especially since the Fed’s recent moves are expected to eventually lead to higher inflation. In fact, prices are already edging up. The US government reported Tuesday that wholesale prices rose much more than expected in July.
More inflation could further weaken the dollar, push bond yields lower and provide another boost to bitcoin.
“Central banks have moved quickly to shore up the economy and some people are expecting a big post-Covid rebound,” Cowan said. “The bounceback could be quite quick.”
Digital gold for younger investors
“Bitcoin’s rise is the same story as gold. Investors are looking for alternatives to stocks, bonds and the dollar,” said Will Rhind, CEO of ETF manager GraniteShares. “Gold is the currency of last resort, but bitcoin has cemented itself as an alternative to the dollar as well.”
TradeStation’s Putra agreed. He said many older investors are sticking with gold to hedge against the dollar’s weakness, although the under-40 set is skewing more towards bitcoin.
“Bitcoin is doing so well and it’s nice to bet on the fastest horse,” Putra said.
Rhind isn’t sure that bitcoin will ever be as popular as gold given that it lacks the commodity’s “universal appeal” because of its volatility.
But bitcoin is winning more converts — even in the corporate finance departments of Corporate America.
Business intelligence software company MicroStrategy announced Tuesday that it recently bought about $250 million in bitcoin to hold it on its balance sheet. Shares of MicroStrategy(MSTR) surged more than 10% on the news.
“This investment reflects our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash,” said MicroStrategy CEO Michael Saylor in a statement.
One expert said he would not be shocked if other companies soon follow MicroStrategy’s lead and add the cryptocurrency to their balance sheets.
“Any firm with a large corporate treasury to manage has to think more about how they allocate their assets,” said Zac Prince CEO of BlockFi, a firm that makes loans with cryptocurrencies. “This is probably the beginning of a trend.”