Since Bitcoin was founded in 2009, the price has skyrocketed from basically zero to nearly $60,000. Its market cap has exceeded $1 trillion which is more than the market cap of Facebook. After an initial surge in 2017, the price of Bitcoin was relatively stable until the pandemic brought renewed interest in the cryptocurrency world. Below we will offer reasons why we believe the cryptocurrency has skyrocketed since the pandemic, the risks associated with investing in Bitcoin, and our recommendation on investing in this highly volatile investment.
Five Factors Causing the Renewed Interest in Bitcoin:
- Decline in USD and currency use: Not only has the pandemic resulted in the decline in the use of paper money to transact but the actions taken—massive fiscal and monetary stimulus—to prevent a global depression pressured some fiat currencies, specifically the dollar. The USD has lost 11% of its value since its March 2020 high and speculators believe that digital currencies can take over the USD as the world reserve currency.
- Increasing acceptance: Companies such as Paypal, Square, and Venmo have started to allow customers to buy and sell bitcoin. Microsoft allows the use of bitcoin on its online gaming system. Fidelity digital allows its institutional customers to use bitcoin as collateral against loans. Sporting teams like the Dallas Mavericks have also adopted the cryptocurrency as a form of payment. Lastly, while once rejected, there has been increasing interest from institutional accounts and hedge funds.
- Negative real yields: Typically, investors would turn to precious metals to escape a negative real yield environment and hedge against the potential of inflation. However, there has been a clear connection between the recent decline in gold and the contrasting rise in bitcoin which suggests investors are turning to bitcoin as a precious metal substitute in times of negative real yields and rising inflation risks.
- Fear of missing out: Bitcoin’s rapid surge has left investors emotional and fighting the long-standing investment mistake by falling into the fear of missing out. Since there is a limitation in the amount of bitcoin that is available to be “mined,” investors are panicking that they will miss out on investing which is only driving the price to bubble-like levels.
- Retail investor surge: With the massive amount of fiscal stimulus being distributed, the world on lockdown for most of the last year and many out of work, we have seen a massive increase in the amount of retail, online brokerage accounts being opened. Robinhood, a well-known mobile trading app saw over 3 million accounts opened in the month of January alone. These investors tend to be short term traders, can tend to chase momentum, and lack the long-term investment discipline that is key to success. Bitcoin is and has been a prime target for these types of investors.
Understanding the Risks Behind Investing in Bitcoin.
- Bitcoin has no store of value so cannot be considered a fiat currency. Bitcoin is not a store of value. It is too volatile, is not backed by a government entity, not regulated, not insured and as of now cannot be stored at central banks. Since it is not backed by any government or physical asset Bitcoin’s value is purely from speculation. To be considered a currency or supplant the U.S. dollar, the Euro, or the Yen, a currency must hold value in all types of stress and turmoil. It is hard to say that the daily swings Bitcoin has experienced since inception satisfies this standard.
- Commonplace for illegal activities, theft, and hackers: Since Bitcoin lacks regulation and transparency, it is known to be a place for criminals, drug traffickers and even suspect countries (North Korea) to transact illegal activities. In addition, cryptocurrency storage is flawed and subject to hackers and theft. It is estimated that hackers were able to steal over $6 billion in cryptocurrencies in 2019 and 2020 alone.(1)
- Bitcoin highly volatile; regulation could make it worse: Bitcoin is a highly volatile product with no way to fundamentally value it. Over just the past four years, Bitcoin has seen two drops of more than 60% and two additional bear markets (a drop of 20% or more). A product that has no fundamental value, is purely speculative, has little to no correlation to traditional asset classes and carries immense volatility has no place in a long-term investment portfolio. In addition, given the “bubble-like” characteristics and non-transparent transactions, regulators often take notice. While the new Administration has not taken a firm stance on Bitcoin, President Biden’s pick for Treasury Secretary, Janet Yellen, has vocally been a critic of the “highly speculative asset.”
- Bitcoin ownership concentrated: Only 2% of the crypto accounts, considered “Bitcoin whales” control 95% of the digital currency.(2) A well-diversified investor would never own a fund or investment manager that carries that much concentration risk. If one of these “Bitcoin whales” opted to unwind their holdings, this could cause significant instability in an already highly illiquid investment.
Verdence View on Bitcoin
In our view, Bitcoin is a concept that uses the complexities of algorithmic math, some technological quantitative mathematicians, and the growing use of the internet as a way of transacting daily life (e.g. PayPal, web banking, etc). However, Bitcoin has no fundamental store of value which is necessary to be considered a currency or commodity, and is extremely volatile. With no earnings, no tangible product, and no valuation, Bitcoin is simply an experiment that is testing the appetite of individuals for an advanced technological payment system. As with any speculative asset moving at the speed that Bitcoin has experienced in recent years, it is impossible to determine how high the asset can go as more and more speculators enter the market. In historical “bubble” scenarios, the asset ascends far beyond any possible expectation and ultimately crashes further than any possible explanation. As a result, we would not recommend the product.
While Bitcoin itself may exhibit “bubble-like” characteristics, it does not necessarily mean the technology behind the way Bitcoin virtually transfers money (i.e. blockchain) does not have value. The blockchain technology anonymously secures the holders of their “currency” and trades it amongst users. This could have immense value and many technology companies are moving to develop this technology for uses in business and finance. As a result, Bitcoin may not even exist in its current form in the future as more and more companies use the underlying concept (i.e. blockchain) to enhance their own businesses. We will continue to assess the development of the entire cryptocurrency market, more specifically the blockchain technology, but at this time would be hesitant to recommend entering this space.
1. Securitymagazine.com as of February 17, 2021.
2. Bloomberg.com, “Bitcoin’s Volatility Resumes After $40,000 Topped for First Time.” As of January 7, 2021.