Cryptocurrencies are being positioned as capital havens
This year has unnerved a great many people in an economic sense due to the restrictions related to the COVID-19 pandemic. This has been reflected in the stock market, which surges and retrenches based on vaccine announcements and distribution timelines. This same volatility has also driven buying of alternative stores of value. This includes that old standby of gold, as well as digital age alternatives like Bitcoin, Ether, and XRP. Bitcoin has just hit levels it last saw in December 2017, briefly setting a new all-time high for the cryptocurrency. We’ll look at the factors driving Bitcoin’s continued strength in 2020 and what it means for the market.
- Bitcoin has surged 90% in recent months and is up triple digits year to date.
- The increased interest in cryptocurrencies during the pandemic is being driven, in part, by investors looking for an alternate store of value.
- Whether this haven aspect of cryptocurrencies pans out over the longer term remains to be seen.
Cryptocurrencies’ 2020 Rally
Bitcoin actually spent most of 2020 trading under the $10,000 mark before catching fire in late October. Bitcoin closed out November at $19,382, meaning it shot up over 90% over a period of a little more than a month. Year to date (YTD), Bitcoin currently sits 158% above where it was in December 2019. These are actually more modest numbers than competing – but less established – cryptocurrencies like Ether (346% YTD), XRP (216% YTD), and Stellar (297% YTD).1 Bitcoin is larger than these others in terms of trading volume and market cap, sitting at over $300 billion, with XRP and Ether next closest at the $60 billion level.
This is where we make the obligatory comparison to U.S. stocks – measured in tens of trillions of dollars – to put Bitcoin’s (and the whole cryptocurrency realm) into context as far as relative size. Cryptocurrencies aren’t trying to be stocks, however, and their status as an alternative store of value is increasingly catching the attention of individual and professional investors. Moreover, where it matters most, Bitcoin has handily beat the S&P 500 and gold futures in terms of performance over the span of 2020.
Leaning Into the Chaos
The pandemic has created unexpected winners and losers across broad sectors of the economy. On a national level, however, it has almost universally been awful. Many countries are opening the fiscal stimulus taps to keep the economy afloat long enough for vaccines to curb the worst of the pandemic. This widespread fiscal stimulus on a global scale has pushed down interest rates and real returns. Adding to this overall chaos, the financial deficits being run by many governments will eventually have an impact on the national finances, putting the future value of their currencies on shaky ground.
In this environment, Bitcoin’s status as speculative investments seems less risky than it would in more stable times. Although there is no centralized management marketing Bitcoin, it is being positioned as a hedge against eventual inflation – similar to gold, but digital. Bitcoin’s ability to act as an inflation hedge or an alternative haven currency like the U.S. dollar isn’t established, but a number of funds have added small risk stakes (generally less than 5%) into Bitcoin and other cryptocurrencies for just that purpose. The rally we have seen in the past two months likely means that more professionals and individual investors have done the same.
Bitcoin Very Different in 2020 versus 2009 or 2017
Although the pandemic, the search for real returns, and an overall desire for haven investments probably contributed the most to Bitcoin’s surge, there is also the fact that it has come into its own as far as acceptance by the general public. Once primarily concentrated among a passionate, tech-savvy user base, Bitcoin can now be used for mundane transactions like buying a coffee or shopping online. The list of retailers that accept Bitcoin (and other cryptocurrencies) continues to grow over time. There is still a lot of volatility as to the daily value of a Bitcoin – as the March low to November high shows – but that value can be tapped more easily than ever before.
The Bottom Line
Bitcoin and cryptocurrency more broadly have benefited from the economic chaos of the pandemic and the national bills piling up to be paid in the future. Although Bitcoin is more of a known quantity than it was five years ago, it is still a speculative investment and should be approached with that level of caution by individual investors.
The fact that it has surged like it has by serving as a haven for some investors during an economic storm shows you just how bad this storm is. Whether this haven aspect of Bitcoin will work to remove some of its volatility in the long term, however, remains to be seen.
Author: James Chen