The price of bitcoin has soared eightfold since March. It was $5,000 a coin then. It was over $40,000 this week. It is one of the best performing things you could have held since the pandemic began. That will have felt great for its early adopters, but it now leaves pretty much everyone in the markets in something of a quandary.
Do we buy or do we sell? Is the exponential rise in the price of bitcoin yet another symptom of the outbreak of speculative mania in markets, a spillover from the rampant overvaluation of the US tech sector that will eventually prove to have no intrinsic value at all and fall to zero or thereabouts (think Tesla with no actual cars), or is it something else altogether – less a mania in the tradition of tulip bulbs and Beanie Babies and more an anti-mania in the tradition of gold?
Think of the reasons to hold gold. If inflation is coming (and it probably is) you want to hold a real asset that can hedge against it – one that can’t be inflated away by relentless money creation and currency debasement. That’s particularly the case in an era of very low interest rates. If governments work to keep interest rates lower than inflation in order to reduce the real value of their horrible debt burdens, everyone knows they need a safe haven, but everyone also knows the traditional ones (government bonds) no longer offer that safe haven. That turns us to gold, the one asset that has a 3,000-year record of protecting purchasing power. No wonder the gold price is up around 40% since 2018. I hold a lot of gold for all these reasons.
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But might bitcoin be better at being gold than gold? The managers of the new SkyBridge Bitcoin Fund certainly think so. The supply of gold isn’t completely static, they say – it rises at about 1.25% a year as more is mined. It can be expensive to store and tricky to transfer around the place in its physical form. It is easily confiscated and it isn’t particularly easily divisible in a hurry.
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Bitcoin has none of these drawbacks. The supply is inelastic and capped (only 21 million digital coins will ever exist). You can send it around the place as easily as you would an email (as long as you don’t lose the codes that allow you to access it). It’s fungible, resilient, verifiable, independent of any government and, crucially, easily divisible (I own a total of 0.0066 of a bitcoin). Transactions in it are permanent and immutable: no institution can erase them. You get the idea. Finally, it is a “millennial” thing. A generational transfer of wealth will gain speed over the next 20 to 30 years. When “wealth is owned by younger people... digital currencies will gain preference relative to anachronistic gold”, says SkyBridge.
Add it all up and it makes perfect sense. SkyBridge analysts are not alone in their passion here. The big driver behind the recent rise in the price of bitcoin has been institutional adoption, with fund and wealth managers beginning to see bitcoin as a legitimate portfolio diversifier. In the UK, the big news has been Ruffer, the investment manager, putting around 2.5% of its Ruffer Multi-Strategies Fund into bitcoin at the end of last year (good call so far!) on the basis that the current macroeconomic environment (extreme monetary policy, ballooning public debt, anger at governments) provides the perfect environment for an asset that “blends the benefits of technology and gold”.
You may be ready to buy in by now. So how rich will it make you? The bulls like to start with the size of the gold market (the value of all gold above ground at the moment is about $12trn) and go from there. This brings JPMorgan to suggest a long-term price possibility of $146,000 and cryptocurrency investor Tyler Winklevoss to offer $500,000 as a “conservative target” if bitcoin becomes a “gold disrupter” with no upper limit at all if it ends up being commonly used as a payments network rather than just another asset to hold and pray over.
A year ago that would have sounded nuts. Now, it looks as if a wave of mainstream institutional investment is really under way – watch out for the multi-asset fund your pension pot is invested in acquiring some). The network is expanding. It appears to sound perfectly reasonable to a large part of the market. $1m here we come.
OK. Let’s come back to earth. Bitcoin has passed a lot of milestones. It has got this far without being banned by governments. It has achieved institutional acceptance (making it much less likely to be banned in future). It has hung on to its number one crypto status and it has made everyone who said it was going to zero feel a bit silly (and a bit poorer than they needed to be).
But none of these things give it intrinsic value. For that, bitcoin needs not just the scarcity its fans rave about: scarcity does not in itself give a thing value. It needs more active investors, it needs a much deeper and more liquid market (only a tiny part of the bitcoin market is ever traded – hence its volatility) and it needs wider acceptance. All these things may happen. And I’ll be buying a little more as a hedge against that – not so much as to ruin me if it goes to zero, enough so that I don’t feel too awful at $500,000.
But the euphoric price rises of the last few weeks still scream mania at me. There is hysterical anger on social media against critics of the oddly specific targets. When no one knows anything, why say $146,000, why not “around $150,000”?. Then there are crashed platform websites – Coinbase had a bad day on Wednesday. All these things will have a familiar feel to bubble watchers.
My go-to inflation hedge will remain gold for the simple reason that it isn’t new. I’m nervous about the next few years and I want a portfolio protector that has a multi millennium record in the safe-haven top spot. I’m also going to take the main lesson from bitcoin (when fixed supply meets rising demand, prices soar) and bump up my general commodity holdings. As economies recover this year they might not rise eight times, but they should see the same (short term at least) dynamic that has made bitcoin do so.
• This article was first published in the Financial Times
