Over the last few months, investors everywhere—established and otherwise—have watched that squiggly line climb on the Bitcoin chart. The crowd-favorite cryptocurrency that was sitting at $4,000 USD last March has seen a near 900% rise. Eyes are fixed on ongoing climb, and everyone’s wondering where to look next.
The recent boom brings to mind the activity of 2017, when Bitcoin first exceeded $20,000. But the 2020 rise is different for a number of reasons. Primary among them: the source of the interest.
Who Cried Bitcoin?
Institutional activity in the crypto-space is at an all time high. Back in May, Paul Tudor Jones announced an intention to invest a ‘low, single-digit percent’ of his portfolio into Bitcoin. The more recent activity of Elon Musk and Jack Dorsey has had the same head-turning effect. In December, Mutual Life Insurance Co. bought 100mn worth, and the Guggenheim Funds Trust also made a sizable investment.
Retail investors, perhaps encouraged by the institutional activity, are also more active. In the last three months, 10 million digital wallets were created on blockchain.com; that number represents the total amount of wallets opened in the 12 months prior. According to a recent market report by UBS, open interest in the Bitcoin futures market has increased threefold since October.
Retail interest is further supported by the fact that buying, owning, and selling digital currencies has never been easier. In 2020, PayPal made the transition to make Bitcoin, Ethereum, Bitcoin Cash and Litecoin to all account holders; this year, they plan to do the same across their Venmo platform.
After its first 2017 peak, Bitcoin earned a new buzz across the media. Weekly Google searches for ‘bitcoin’ quickly climbed to 30,000. But the result of this recent boom is different. Replacing the buzz and the Google search is tangible market action; everyone seems to want to have a hand in the game.
At What Risk?
Almost by design, the intrinsic value of Bitcoin is hard to understand. Without any knowledge of future cash flows, it’s almost impossible to come up with a true valuation. Instead, the question of diversification has become a top priority for investors who are considering adding Bitcoin to their portfolios.
The UBS report charts Bitcoin’s correlation with a wide range of other asset classes—bonds, stocks, and gold—from 2016 to present. Except for a few spikes, the correlation is low. This suggests that an investment in Bitcoin is a useful way to diversify a portfolio. Next comes the question of risk-reward. UBS’s research indicates that holding Bitcoin when the price is stagnating or declining would not improve the risk-reward of a portfolio. The conclusion, then, is that Bitcoin is useful for portfolio diversification only when the prices is steep and rising.
The question at the heart of an investors decision is what makes the Bitcoin conversation so interesting. Investors are betting on future use cases. From digital gold to a decentralized global settlement system, the potential is there. A bet on Bitcoin is often a bet on its viability as a wealth storage system. Investors with this framework are relying on an increasing user count; more people would need to adopt Bitcoin for wealth storage, and enough buyers would be needed to absorb new units. An investor’s confidence in that future is his or her best guess for the still unknowable question—is bitcoin a bubble, or not?
In December, Paul Tudor Jones predicted crypto would have ‘a crazy rocket ship ride.’ Prospective investors should enter with an exit strategy, invest only what they can lose, and buckle up tight.
Zain Jaffer is the Founder and CEO of Zain Ventures, an investment firm with over $100 million in assets under management. Zain also mentors and invests in frontier tech start-ups across the USA.