Bitcoin, the new gold, or the mother of all bubbles?
A spectacular newcomer
The year is not yet two weeks old, but one investment has already taken a complete rollercoaster ride in this short time. Bitcoin — there is no other way to describe it — popped up 40 percent in one week. Then the cryptocurrency plunged 25 percent in a single day, only to rebound quickly. A single bitcoin sold for 35,000 dollars today, still more than 20 percent more than on the last day of last year. By the way, when we take a look at the price development of the world’s first cryptocurrency, the spectacular development of bitcoin becomes clear. The coin saw the light of day in 2009. In 2011, the coin was still trading at 11 dollars, and you could buy a pizza for it. In 2017, however, more than 19,000 dollars were paid for it. A big speculative bubble, many cried in chorus. In the following year, bitcoin indeed lost 83 percent of its value. Since then, however, the currency has risen to new heights. With last week’s provisional high of 40,000 dollars.
What is Bitcoin?
What is Bitcoin? With the growing number of online transactions and increasing distrust of banks after the financial crisis of 2008, the demand for a new digital payment method is rising. In 2009 the currency was designed by a certain Satoshi Nakamoto. It is still not known who is behind this pseudonym. The bitcoin uses blockchain, a decentralized digital ledger. This allows transactions to take place directly between two parties. (Central) banks become superfluous and governments and central bankers no longer have any influence on the amount of money in circulation. However, it is not yet that far as bitcoin is not yet a widely accepted means of payment. It has recently become possible to pay with bitcoins via the payment service PayPal.
Three years ago the CEO of J.P. Morgan called bitcoin a scam. In the same year, the CEO of BlackRock dismissed the currency` as “a money laundering index”. And in her last press conference that same year, then-Federal Reserve Governor Janet Yellen called bitcoin highly speculative and not a “stable store of value”. Since then, however, bitcoin has doubled in value and is viewed differently. The year 2020 was the year bitcoin went institutional. Legendary fund manager Paul Tudor Jones was the first to express his belief in bitcoin. Later, other top investors such as Stanley Druckenmiller and Ray Dalio joined in. In the meantime, BlackRock also takes a different view of the currency. According to them, bitcoin has reached a stage where it “could be an appropriate investment in the context of a broader investment portfolio”. They were also joined by the successful investor Bill Miller. Grayscale Bitcoin Trust — the world’s largest bitcoin investment vehicle — stated that 84 percent of new money inflows last year came from institutional investors.
An alternative to gold?
Why this sudden popularity among reputable investors? Bitcoin seems to be taking over the role of gold. After all, gold was always an asset that investors could use to protect themselves against the depreciation of money. In fact, gold was a form of solidified distrust of central banks and the banking system. Now that governments and central banks are borrowing and printing money in improbable quantities, more and more investors are becoming concerned about their value. The more money that comes into circulation, the more its value declines. Government bonds no longer offer any protection against this. It is not surprising that people then start looking for a scarce asset.
And in a rapidly digitising world, that asset is bitcoin. After all, the number of bitcoins that can be mined is limited. This is because bitcoin is set up in such a way that the more of them are made, the harder it becomes to produce new ones. In 2016, 108,000 new bitcoins were created, in 2017 only 60,000 and by the end of 2020, there were only 13,500. Eventually, 21 million bitcoins will have been created by 2140. There will be no more. And it is precisely for this reason that bitcoin is so popular with more and more investors. Money is being overprinted on an increasingly large scale and is therefore becoming worth less and less. This is not the case with bitcoin. If bitcoin were to take over the role of gold, its value could even reach 146,000, according to analysts at J.P. Morgan.
A bubble or new stable investment?
Who knows if this will come true? The value of a currency stands or falls with the confidence in it. Modern money is nothing more than fiat money. There is no value in it either. The gigantic amounts of money that authorities around the world are creating to carry the improbable burden of debt are making more and more investors nervous. A search for value-sensitive investments is not surprising then. And in a digital world, a digital solution is appropriate. Gold has fulfilled this role for thousands of years, but it may have to make way for this newcomer. It is tempting to dismiss bitcoin’s surge in popularity as a speculative mania, similar to tulip bulbs. Perhaps that is right. Perhaps it is not.
Chelton Wealth — Quanify GmbH is an independent asset manager. We serve private individuals, institutions, foundations and entrepreneurs with independent and personal asset management. If you would also like to be kept up to date with the latest news, please sign up here for our weekly newsletter. Would you like to know more about the possibilities? Then request a callback. We will contact you without obligation.
Missed an article? No problem, just visit our MARKET BLOG