What investors need to know about Bitcoin

By the time you read this, gravity may have reasserted itself, but by early January the price of Bitcoin had rocketed to a record high above $40,000, doubling in a month. This capped a vintage year for the original cryptocurrency—a type of global, digital money whose integrity is guaranteed by an online database rather than government or central bank oversight. Its price almost quintupled during 2020, despite the crash in world markets earlier that year. 

We’ve been here before. The last spike was 2017, when BTC started the year below $1,000 and peaked at $19,000, before crashing to earth. Now, BTC is back. The price surge is intriguing. Are people buying as a hedge against the inflation and currency debasement that money-printing by central banks could cause? Quite possibly. BTC’s design limits the number of possible coins to 21m, so it cannot be “printed” ad infinitum, unlike conventional currencies. In that respect it is like gold—a favourite refuge of sound-money advocates—which also saw strong buying in 2020.  

What other factors might be at play? Perhaps BTC’s surge is a sign that illicit e-commerce purchases paid for in BTC on the untraceable “dark web” are exploding? Or that more people are using BTC to move capital quietly across borders? 

The most likely explanation is the simplest: surging demand meets finite supply. This is a classic bubble dynamic. Rising prices pull in investors, causing further price rises. The major players this time are younger investors, who also fed the surge in retail share dealing in the US after the March crash last year, and—strikingly—financial institutions that until now have given BTC a wide berth. Even Ruffer, which I mentioned last month as a risk-conscious asset manager, has moved 2.5 per cent of its portfolio from gold to BTC, arguing it is “a small but potent insurance policy against the continuing devaluation of the world’s major currencies.”

Should we follow? Institutional buying suggests the price may have stronger support than three years ago, but even so, investing directly in such a volatile asset is like riding a tiger. There’s no harm in punting “fun money” on it, but I’d rather take any exposure via well-diversified funds run by expert risk managers. I suspect we will see more of these in 2021—and they’ll need every ounce of their expertise to tame BTC. 

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