It Looks Like Wall Street Is Running Bitcoin, at Least for Now

LISTEN TO ARTICLE

SHARE THIS ARTICLE

A lot of investments have gone berserk lately, but none stand outquite like Bitcoin. Its price quadrupled in a matter of months to touch a record high of more than $41,900 in early January, propelling the cryptocurrency back into the limelight less than three years after a spectacular 75% crash. (It traded at around $36,400 on Jan. 19.)

Nothing about Bitcoin’s fundamentals has changed. A Bitcoin is just a piece of digital code that produces no earnings, pays no dividend or interest, and is backed by nothing but the belief of other people that it might be worth something.

One big thing that’s happened is that some on Wall Street have joined the crypto believers’ club. Hedge fund manager Paul Tudor Jones helped set off the frenzy when he said in May he was buying Bitcoin as ahedge against the inflation he sees coming in the wake of policymakers’ aggressive actions to keep the economy alive in the coronavirus pandemic. (The idea is that Bitcoin could be inflation-proof, because it’s designed to have a limited supply.) His announcement was followed by proclamations from other prominent investors, including Stan Druckenmiller.

“When you have a few quarters of people delivering good returns and saying, ‘Oh, it’s because I have Bitcoin in my portfolio,’ which we’re starting to see evidence of, then I think the pressure will really heat up to be adding Bitcoin,” says James Butterfill, investment strategist at digital asset manager CoinShares.

Funds investing in cryptocurrencies have flourished in recent months. A popular trustfrom Grayscale took in $4.7 billion in 2020, more than almost 99% of exchange-traded products listed in the U.S., according to Bloomberg Intelligence. Fidelity Investmentsintroduced a Bitcoin fund for wealthy investors. AndBitwise Asset Management, a crypto index funds provider, recently surpassed $500 million in assets under management, a fivefold increase from the end of October.

Whether the inflation that Bitcoin investors worry about will materialize is a big question—consumer price increases have been muted for years, despite more than a decade of rock-bottom interest rates. Another question is whether an asset that often sees steep declines will really prove a reliable store of value. Bitcoin is still a relatively thinly traded asset, and its price can be dramatically affected by ahandful of large holders known as whales. Although platforms such as Robinhood and PayPal are making it easier for individuals to use and trade Bitcoin, about 2% of the anonymous accounts that can be tracked on digital ledgers own 95% of the tokens, according to researcher Flipside Crypto.

Wall Streeters’ interest in Bitcoin may say as much about their professional incentives as the investment case. Cryptos can look like a chance, albeit a risky one, to generate some outsize returns in a world where opportunities seem scarce. “There’s just a ton of money looking for somewhere to invest and not wanting to go invest more into negative real yields and equity markets that are at record highs and that seem to be starting to reach valuation limits,” says Chris Gaffney, president of world markets at TIAA Bank.

Asset managers, and especially the hedge fund impresarios known in the trade as macro investors, need to stand out from their peers. “You think about how these macro players view the world, and they all have a different edge, but significantly, they’re trying to figure out what is the item that is going to capture the most mind share, the most wallet share, and the most momentum of the entire world,” says Catherine Coley, chief executive officer at the crypto trading platform Binance US. Coley thinks this can continue for a while. “Right now at current levels, there’s the least amount of people that we’re going to see invested in this,” she says. “Starting tomorrow there will be more; starting the next day there will be more.”

There’s a domino effect, says Gaffney, when a handful of institutional investors move into a market that then sees a tremendous runup. Others start to take an interest because it can be too risky—for their careers—not to at least buy a little. “So, ‘Oh my goodness, my competitors and the people I’m going to be compared with are invested, and they’ve beat me to it’—if you will—‘so I better get invested too,’ ” he says. “That creates momentum in an investment—and especially an investment that has a relatively small market and not the normal liquidity figures.” The tricky thing about momentum, as Bitcoin’spast crashes have shown, is that the pendulum can very suddenly swing the other way.

Source: Read Full Article