• LSESU Trading Society

Bitcoin back in the spotlight

Updated: Dec 10, 2020

By Alexandros Violetti, Analyst at LSESU Trading Society

With the world focussed on the impact of Covid-19 and the aftermath of the US election on capital markets, an old actor is slowly taking the stage. In the last week of November, the price of Bitcoin has shot up to $19,359, a level not seen since the 2017 crypto hysteria where its price peaked at $19,783 before a spectacular crash wiped out 80% of its peak value by the end of the year. Bitcoin, a digital currency that is independent of central banks, has been around since 2008 and has established itself as a legitimate form of alternative investment that has forced prominent hedge fund managers to reevaluate their attitudes towards cryptocurrencies.

Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, tweeted that "I might be missing something about Bitcoin so I’d love to be corrected". He added that Bitcoin has been rising in tandem with the price of gold, a sign that investors are considering cryptocurrencies as a legitimate hedge against long-term inflation concerns brought about by the massive government stimulus packages in response to Covid-19. Coupled with the quantitative easing agendas of central banks which tend to reduce the value of traditional currencies, the monetary independence of Bitcoin has certainly become its defining attribute. Indeed, the Grayscale Bitcoin Trust has recently seen strong inflows at a time where ETFs tracking gold are experiencing significant outflows, indicating a long-term shift towards Bitcoin as a trusted safe-haven asset during turbulent times.

A key driver of Bitcoin’s revival has been online payments company PayPal, which announced on October 21st that it will allow its users to trade Bitcoin on its platform as well as use the cryptocurrency as a medium of exchange with verified merchants. This has had the effect of reducing the barriers to purchase cryptocurrencies (e.g. taking a selfie with your passport) and thus bringing new demand to the market.

Most importantly, Bitcoin has become more mature as an asset compared to how it was in 2017. According to strategists at JPMorgan, cryptocurrencies showed strong resilience during the March turbulence compared to equities, currencies and treasuries and so have essentially passed their first stress test. Liquidity levels, measured by the bid-ask spread at the peak of the crisis, recovered much faster than other asset classes indicating a newfound confidence in cryptocurrencies.

It is still too early to predict what the future holds for Bitcoin. Yet, it is hard to ignore the value of cryptocurrencies as a hedge against inflation as well as their distinct characteristic of being the only asset that cannot be directly manipulated by governments. Fund managers should therefore keep an open mind and leverage the versatility of Bitcoin in their portfolio strategies.

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