For years, critics have decried the cryptocurrency as a fraud, a rip-off, a sucker’s bet that has no useful purpose in the real world and is simply a vehicle for pure speculation like the tulips of the Dutch Golden Age.
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And yet, Bitcoin has surged more than 370% since its 12-month low on March 16, and boosters are giddy. FOMO is indeed running hot.
Before you sink your savings into an asset that can drop 10% in a morning with no warning, it may be wise to heed the advice from veteran crypto traders and market experts. There are a lot of forces at work in this run-up only now coming to light, and serious questions about what comes next.
Of course, there have been big swings in recent memory. In 2017, Bitcoin fired investors’ imaginations with a monster rally. The holiday season that year was filled with talk about the latest crypto to hit the market and a future of digital cash. But Bitcoin crashed hard in 2018, losing about 80% of its value. Investors still don’t really know why.
This time around, the first thing you need to know is that the surge isn’t driven just by wide-eyed retail investors. The financial establishment is throwing its weight into crypto, too.
In recent weeks, PayPal Holdings Inc., Visa Inc. and even the 169-year-old Massachusetts Mutual Life Insurance Co. have embraced Bitcoin in some way. In the meantime, hedge-fund stalwarts such as Eric Peters and Alan Howard, the co-founder of Brevan-Howard Asset Management, are investing hundreds of millions of dollars in Bitcoin as well. Rising mainstream acceptance of cryptocurrencies is one of the big drivers in this rally.
Still, new investors should be clear-eyed about what Bitcoin is truly good for.
Invented 12 years ago as a new form of decentralized, universal money, Bitcoin has actually failed to fulfill that role, says Frances Coppola, an economist and author of “The Case for People’s Quantitative Easing.” That’s why PayPal’s decision to permit accountholders to use Bitcoin to buy things from its worldwide network of merchants is going to be such a revealing experiment next year.
What was remarkable about Bitcoin’s performance this year is that it’s starting to be described as a go-to asset in hard times. Gold has owned that role for millennia. But in 2020, the precious metal has underperformed Bitcoin. There is mounting evidence that investors are opting for the digital currency as a way to hedge economic risks, especially the devaluation of major currencies that may be triggered by the tsunami of fiscal and monetary support that’s flooded the world’s major economies.
“I don’t think investors are interested in Bitcoin as a medium of exchange,” Coppola said in a live chat conducted by Bloomberg News on Wednesday. “I think they see it as a speculative asset and as an inflation hedge.” [Terminal clients can access the TLIV here.]
This is a key reason why Peters, the head of head of One River Asset Management, is preparing to hold up to $1 billion in Bitcoin and Ether, the No. 2 cryptocurrency, by early 2021.
“It’s trending in that direction for sure,” added Dave Weisberger, the co-founder of and CEO of CoinRoutes, a U.S. cryptocurrency software firm. He said investing in Bitcoin is like making a bet that someday it truly will be the equivalent of gold.
Seasoned retail investors are excited by the historic performance but are urging newbies to cool their jets. “It’s a hold for now,” says Jay Smith, a longtime crypto bull and widely followed investor on the eToro trading platform. “We are entering new territory, and it feels like Bitcoin is finally being accepted as a new asset class, but there is still a long way to go.”
Other traders warn investors not to abruptly crank up their risk appetite or make radical changes to their portfolios just to accommodate crypto. Heloise Greeff, an investor based in Oxford, England, believes that Bitcoin is the “new gold” and is tempted by the run-up. Yet she’s not going to rip up her investment approach. “For a moderate-risk portfolio like mine, investing in Bitcoin is like buying a lottery ticket,” says Greeff, who pocketed a 44% return so far this year without taking the plunge. “Someday I might do it, but I will assess the risk accordingly.”
Then there are those who are totally cool with just sitting out the Bitcoin story altogether. Teoh Khai Liang, a Malaysian trader on eToro, expects Bitcoin’s price will probably continue to increase and buying it to diversify a portfolio isn’t the worst idea in the world. But he just can’t make his peace with its speculative nature.
“Bitcoin has been in the market for more than 10 years, so why buy at an all-time high?” says Liang, whose portfolio is up 59% this year. “I would caution retail investors who want to get involved with Bitcoin — don’t. Don’t buy, don’t hold, don’t sell. Just stay away from this.”
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