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What Next for Bitcoin?

Hopes were high after the cryptocurrency reached an all-time, US$20k high in late November 2020. But then came the slump. MATTHEW FEARGRIEVE asks whether this volatility heralds another spell in the doldrums for Bitcoin, or whether the alternative investment is finally making its mark as a serious portfolio proposition for professional and retail investors alike.

Photo of a bitcoin cryptocurrency matthew feargrieve

Crypto investors could be forgiven for thinking that Christmas had come early when Bitcoin reached an unprecedented intraday high of US$19,510 this week, a rally of 400% since the drop-off at the start of the pandemic's spread in Europe and the US back in March, beating the 2017 high of US$19,458.

As investors sought to push firmly to the backs of their minds the 80% slump that followed the 2017 high, analysts were quick to explain the basis on which Bitcoin had rallied so convincingly. The volatility and underperformance of mainstream asset classes during the COVID crisis had pushed professional and retail investors to dip their toes deeper into the crypto pool.

Analysts were keen also to spell out, in reassuring tones, the reasons why this rally would be sustained, in contrast to the short-lived momentum of 2017. The shrinking effect that the virus has had on the investible universe as a whole, together with the bigger allocations of banks and hedge funds, combined with millions of locked-down, returns-hungry retail investors with time on their hands, all contrived to create an unstoppable momentum that pushed the cryptocurrency to such a high. And would keep on driving it upwards.

Such was the rhetoric. Then, in a chilling replay of 2017, came the slump. A mere twenty-four hours later, and the currency was trading 14% lower at US%17,000 (London, 27 November). The question in the minds of analysts, crypto investors and the markets is: is this a natural correction in the first leg of a long-term upward trend? Or is it the beginning of a re-run of the 2017 slump?

Bitcoin investors are painfully aware of the prolonged dormancy of the asset that followed the 2017 slump. Many are right now comparing the severity of the descent of 2017 with the drop-off this week. After the high of US$19,458 was reached in December 2017, the currency slumped to below US$7,000 in February 2018 and then slid further to US$3,000 at the end of 2018.

As ever, Bitcoin is divisive. It has its bulls and its doubters. Some of the bulls are just as bullish, notwithstanding the 14% drop-off this week. Notably bullish players like Grayscale Bitcoin Trust and JPMorgan point to Q3 2020 inflows that are three times larger than last year's, with Grayscale reporting Q3 inflows from professional investors in the region of US$1bn (taking Grayscale's AUM to US$10bn). The cryptocurrency has been enjoying a tailwind since the start of the year, when hedge fund managers Paul Tudor Jones and Stanley Druckenmiller gave it a degree of endorsement. In October PayPal announced that it had pivoted to implement the acceptance of cryptocurrencies.

Analyses of the origin of inflows into Bitcoin over 2020, conducted by various industry player including Refinitiv, reveal a trend that has gained momentum quarter on quarter: that institutional investors (including pension plans and family offices, for which crypto can act as a hedge to interest rates and equity markets) and retail investors have come to displace hedge funds as the biggest makers of long-term bets on the cryptocurrency.

The Bitcoin Bulls point to a combination of the unique circumstances of 2020, the cheapness of the asset in March and the significant inflows since then, as a strong basis for its continuing rise, notwithstanding the dip that has followed hot on the heels of the record high last week.

Bitcoin's position relative to that bellwether of market volatility - gold - has become increasingly more interesting as the pandemic has progressed. Notwithstanding the (seemingly inherent) volatility of crypto, some institutional investors have been showing signs of treating it as a bedfellow of, or alternative to, gold as a safe-haven asset, according to a report by JPMorgan, a trend that has seemingly not been discouraged by the 50% slump in Bitcoin's value in March. It is too soon to see what impact the recent 14% drop-off, and any further slides, may have on this school of thinking.

Of course, Bitcoin continues to have its doubters. For many in this camp, it is this scary volatility that renders Bitcoin and cryptocurrencies in general as uninvestable. Others point to it being a purely speculative, bubble asset with no intrinsic value and no regulatory overlay. The 2020 rally has not made concerns about its susceptibility to fraudsters go away. Larger asset managers remain wary. Bitcoin does not exactly enjoy a track record of being a stable store of value, and exhibits a profound tendency to fluctuate in a range that is much bigger than competing assets like gold.

The outlook for Bitcoin was made more uncertain this very same week, with the S&P500 and European indices rallying on vaccine news, and gold experiencing a corresponding drop of 2% as outflows from gold ETFs continued on the back of vaccine hopes and a Biden presidency.

Bitcoin is at a crossroads. Market attention will focus on how resilient Bitcoin prices prove to be in an environment of stock market buoyancy and low inflation, increased regulation and its attendant drag on performance. These conditions, if they persist, surely herald another spell in the doldrums for crypto. For this writer, the Bitcoin rally is over.

Matthew Feargrieve is an investment management consultant. You can read his blog here and see his Twitter feed here.


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