Bitcoin investors are having a wild ride. The best-known cryptocurrency reached a series of records in 2021, just three years after its price collapsed, wiping out more than two-thirds of its value. The latest bout of roller-coaster volatility comes as more big investors are speculating that Bitcoin will gain wider acceptance and shake up the financial world, maybe by filling the role of gold as a hedge against inflation better than gold can.
Why the big comeback?
Bitcoin quadrupled in price in late 2020, as a flurry of developments suggested it was taking more steps toward going mainstream. In October, global payments giant PayPal Holdings Ltd. started letting customers use it for purchases.. Its fans include Elon Musk, the provocative chief executive officer of Tesla Inc., which invested $1.5 billion in Bitcoin and now accepts the coin as payment for their cars. At the same time, the flood of money pumped into the financial system by central banks during the pandemic renewed a debate about whether such moves could spark inflation – generating more interest in both gold and Bitcoin, since both are viewed as scarce assets.
Is this another bubble?
Each upswing energizes Bitcoin’s true believers and catches popular attention -– the total market value of all cryptocurrencies topped $1 trillion for the first time in early January. Hot financial technology startups such as Robinhood and Revolut have made crypto a key part of their trading and banking apps. Still, investing in crypto remains a risky and volatile prospect, as the instruments remain largely unregulated assets subject to the volatility of a fickle market. Bitcoin’s advance around the start of 2021 has been so swift that it dwarfs all other boom cycles in financial assets over the past 50 years!
Who buys and uses Bitcoin?
Prominent money managers such as Mike Novogratz and Alan Howard have invested hundreds of millions of dollars in Bitcoin and other cryptocurrencies. A survey Fidelity Investments conducted in 2020 found that 36% of institutional respondents held crypto in their portfolios. More than six out of 10 expressed interest in Bitcoin and other cryptocurrencies, up from fewer than half in 2019. To be sure, Bitcoin is still a thinly traded market, where so-called whales, controlling large quantities of coin, hold huge sway. Less than 2% of anonymous accounts that can be tracked on the coin’s digital ledger control 95% of the available supply, according to researcher Flipside Crypto. A whale’s exit — a more likely event now that Bitcoin is the domain of not just believers but also pragmatic financiers — can send ripples throughout the ecosystem.
What’s the appeal for investors?
In short, greed and fear. Bitcoin’s fans argue its recent rally isn’t comparable to other euphoric stretches, as the asset has matured with the entry of institutional investors. Zero and negative yields on traditional assets such as government bonds are driving hedge funds to seek out alternatives, and there’s a fear of missing out as the coin rallies to record after record. While nay-sayers have long said that Bitcoin’s will inevitably collapse again, many have recently had to revise their thinking — simply because enough people seem to believe in it. There’s also more discussion of Bitcoin as a legitimate hedge against inflation risk and any weakness in the U.S. dollar.
Why is Bitcoin compared with Gold?
As a scarce resource, gold has traditionally been a hedge against inflation; it surged to a record high in August 2020. Governments can speed up their treasuries’ printing presses and thereby debase their currencies, but miners can’t flood markets with gold, goes the thinking. Part of Bitcoin’s appeal lies in the fact that it isn’t controlled by governments or their monetary policies, and that its supply is limited even more strictly than gold’s. With the vast spending by governments and central banks in response to the pandemic raising fears of inflation after economies recover, more attention is being paid to Bitcoin as digital gold.
Intuitional investors may be feeling more comfortable wading into Bitcoin in part because of better safeguards -– even as more captivating tales emerge of millionaires thwarted by losing their password. Over the past few years, Bitcoin has also developed a more substantial financial infrastructure. There are custody and trading services — with proper licenses and credentials — that cater specifically to the large regulated investors. The U.S. Treasury Department, for instance, has proposed requiring banks and other intermediaries to maintain records and submit reports to verify customer identities for certain cryptocurrency transactions. A number of central banks, including the U.S. Federal Reserve and the European Central Bank, are studying how to digitalize sovereign currencies, a validation of the blockchain code underpinning Bitcoin. Still, Bitcoin and other cryptocurrencies have been connected with scams, money laundering, tax evasion, cyberthefts and more.
How can I buy Bitcoin?
Bitcoin is not a regulated security, but recently has been allowed to be custodied by a broker dealer. However, self-custody is still the most common way. You can download a bitcoin ‘wallet’, which will be associated with a “public key.” A quick google search will give you plenty of wallet options. Your public key is your wallet’s address, where bitcoin can be sent. Your private key is the means in which you can access the bitcoin in your wallet. This is critical to safeguard, because while the bitcoin blockchain cannot be hacked, you can certainly have your private keys stolen. If your private keys are stolen, your bitcoin is stolen, and the likelihood of recovery is essentially zero.
Investing in Blockchain
Currencies, such as Bitcoin and Ethereum, have garnered much attention and excitement, but investing in them is challenging, time-consuming and entails significant volatility.
Blockchain is the record-keeping technology behind cryptocurrency. Unlike the use of cryptocurrencies as a standalone investment, the broader blockchain technology entails less volatility and provides investors a more streamlined exposure to cryptocurrency and other emerging blockchain uses. (e.g. mass scale micropayments and applications that allow, for instance, a new musician to cut out the expense of a middleman and go directly to the consumer).
The ‘Demand Blockchain’ portfolio is designed as a comprehensive investment solution. It has exposure to over 50 companies that are actively involved in the development and utilization of blockchain technologies. While a significant portion is allocated to the blockchain industry, we ensure that your portfolio is also globally diversified, which reduces volatility in the event of blockchain sector underperformance.
Are you interested in investing in the evolution of blockchain technology as part of a diversified investment strategy? If so, we are here to help! Open an account here or schedule a Zoom conference with one of our advisors today.
This report is a publication of Demand Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.