A lot of investments have gone berserk lately, but none stand out quite 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.)<\/p>\n
Nothing about Bitcoin\u2019s 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.<\/p>\n
One big thing that\u2019s happened is that some on Wall Street have joined the crypto believers\u2019 club. Hedge fund manager Paul Tudor Jones helped set off the frenzy when he said in May he was buying Bitcoin as a hedge against the inflation he sees coming in the wake of policymakers\u2019 aggressive actions to keep the economy alive in the coronavirus pandemic. (The idea is that Bitcoin could be inflation-proof, because it\u2019s designed to have a limited supply.) His announcement was followed by proclamations from other prominent investors, including Stan Druckenmiller.<\/p>\n
\u201cWhen you have a few quarters of people delivering good returns and saying, \u2018Oh, it\u2019s because I have Bitcoin in my portfolio,\u2019 which we\u2019re starting to see evidence of, then I think the pressure will really heat up to be adding Bitcoin,\u201d says James Butterfill, investment strategist at digital asset manager CoinShares.<\/p>\n
Funds investing in cryptocurrencies have flourished in recent months. A popular trust from 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 Investments introduced a Bitcoin fund for wealthy investors. And Bitwise Asset Management, a crypto index funds provider, recently surpassed $500 million in assets under management, a fivefold increase from the end of October.<\/p>\n
Whether the inflation that Bitcoin investors worry about will materialize is a big question\u2014consumer 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 a handful 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.<\/p>\n
Wall Streeters\u2019 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. \u201cThere\u2019s 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,\u201d says Chris Gaffney, president of world markets at TIAA Bank.<\/p>\n
Asset managers, and especially the hedge fund impresarios known in the trade as macro investors, need to stand out from their peers. \u201cYou think about how these macro players view the world, and they all have a different edge, but significantly, they\u2019re 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,\u201d says Catherine Coley, chief executive officer at the crypto trading platform Binance US. Coley thinks this can continue for a while. \u201cRight now at current levels, there\u2019s the least amount of people that we\u2019re going to see invested in this,\u201d she says. \u201cStarting tomorrow there will be more; starting the next day there will be more.\u201d<\/p>\n
There\u2019s 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\u2014for their careers\u2014not to at least buy a little. \u201cSo, \u2018Oh my goodness, my competitors and the people I\u2019m going to be compared with are invested, and they\u2019ve beat me to it\u2019\u2014if you will\u2014\u2018so I better get invested too,\u2019 \u201d he says. \u201cThat creates momentum in an investment\u2014and especially an investment that has a relatively small market and not the normal liquidity figures.\u201d The tricky thing about momentum, as Bitcoin\u2019s past crashes have shown, is that the pendulum can very suddenly swing the other way.<\/p>\n