Bitcoin Is Back Trading Near Three-Year Highs

The digital currency is up 90% this year, outpacing stocks, gold and other assets. Bitcoin Is Back Trading Near Three-Year Highs

A Bitcoin Change Shop In Istanbul; A Renewed Surge Of Interest In Bitcoin Appears To Be Tied To Its Potential As A Hedge Against Inflation.

While stocks, oil and gold prices careened last week, one asset set new highs for the year: bitcoin.

The price of the digital currency has surged about 90% in 2020 and traded as high as $13,848 on Tuesday, according to CoinDesk. That is the highest level since January 2018, when bitcoin was coming down from its record high of $19,783 set in the previous month.

Bitcoin Is Back Trading Near Three-Year Highs

Many investors agree the renewed surge of interest is tied to bitcoin’s potential as a hedge against inflation.

Bitcoin’s proponents have touted that prospect for years, mainly because the bitcoin network has a set limit on the number of units that can be created: 21 million.

With the coronavirus pandemic wracking economies across the globe, governments and central banks have been forced to spend trillions to prop up their economies while sapping the purchasing power of their currencies. That has revived fear that inflation will ramp up in the coming years, and that fear is winning bitcoin new converts.

Some of them include publicly traded companies. Square Inc., which allows users to buy bitcoin on its Cash App, bought $50 million worth of the digital currency in October to use as a hedging instrument in its corporate treasury.

Virginia-based software provider MicroStrategy Inc. made a similar play earlier in the year, buying about $425 million of bitcoin to hold in its corporate treasury. Chief Executive Michael Saylor said in August that the company expected government responses to the pandemic to have a depreciating effect on fiat currencies and saw bitcoin as a viable alternative.

Attracting new investors has been a long-sought goal for the crypto industry. Since the 2017 bubble popped, the bitcoin industry has been trying to build out an infrastructure for professional investors, creating everything from exchange-traded funds to options markets and custody services.

Future Interesttrading Volume On The Bakkt Options Exchange Exploded In Recent Months

Although the Securities and Exchange Commission has yet to approve a bitcoin ETF, other services are in place. And investors are beginning to embrace them.

“You had all these rails for institutional capital to come in,” said Matthew Hougan, chief investment officer at BitWise Asset Management. “Then you had the sharp catalyst: the response to the pandemic and concerns about inflation.”

Bitcoin Is Back Trading Near Three-Year Highs

BitWise, which offers crypto-based index funds to financial advisers, hedge funds and family offices, saw its assets under management rise to $100 million as of Wednesday from about $70 million in June, Mr. Hougan said.

The largest seller of crypto-based investment products, Grayscale Investments, reported third-quarter inflows of $1 billion into the trust-fund products it sells in the over-the-counter market, raising its total assets under management to $5.9 billion. That growth has accelerated in the current period. The company said Wednesday that its assets under management had grown to $7.6 billion.

Options activity is increasing, too. In late 2019, for example, the number of bitcoin futures contracts traded on the Bakkt platform averaged about 1,300 a day. By September, that average had grown to 8,700.

Bakkt, a bitcoin options market founded by Intercontinental Exchange Inc., has been attracting traditional hedge funds and trading firms and even more recently mainstream brokerage houses, said Bakkt President Adam White.

“They’re taking a hard look at crypto and bitcoin,” he said.

Bitcoin’s potential use as a payment option even got a surprising boost earlier in October when PayPal Inc. said it would allow users to directly buy and sell bitcoin in their digital wallets. In 2021, it plans to expand the service to Venmo and allow the 26 million merchants that use PayPal to accept bitcoin for payment.

These developments together have helped push bitcoin’s total market value up to about $255 billion from about $130 billion in January.

To be sure, those inflows are modest compared with the wider capital markets, where U.S. stocks alone are worth nearly $52 trillion. But for the small digital-currency market, it is notable.

“The market is just not that big,” Mr. Hougan said. “A few institutions making an allocation is significant.”

The question for the bitcoin market is the degree to which those flows will continue to increase. For all the feel-good news, there are still substantial question marks.

For example, even with PayPal opening bitcoin up to merchants, there may not be much demand for it as a means of payment, especially in the U.S. That is because the Internal Revenue Service has stepped up its effort this year to treat bitcoin not like a currency but like a security, forcing users to pay capital-gains taxes on any transaction that results in a gain.

Moreover, bitcoin’s claim as a haven asset or inflation hedge has yet to be proven. For one thing, it has been around for only about 11 years, and for most of that time, it has been ignored by the mainstream and viewed a curiosity for risk takers. It has no record as a wide-scale asset class.

Also, inflation may simply fail to take off no matter what central banks do, much as it has for the past decade or so. That would undercut bitcoin’s use as a hedging tool.

Ultimately, bitcoin is still a risky, speculative asset, said Chris King, founder of crypto-focused investment firm Eaglebrook Advisors, which recommends clients keep no more than 5% of their total assets in crypto.

“Don’t put in more than you can afford to lose,” he said.

Bitcoin advocates say this time will be different as the virtual coin surges back to price levels last seen in the wake of the cryptocurrency market collapse almost three years ago.

The largest digital coin has jumped more than 25% this month and grazed $13,858 on Wednesday, the highest since January 2018. It’s been quite a ride since the bubble burst: From an all-time high in December 2017 of nearly $20,000, Bitcoin tumbled to as low as $3,136 within a year.

Proponents of digital assets say the recent rally isn’t another speculative frenzy among individual investors. They point to rising institutional interest, PayPal Holding Inc.’s decision to allow customers access to cryptocurrencies and the use of JPMorgan Chase & Co.’s JPM Coin to make a payment for the first time.

“This rally seems to be more driven by allocators with larger balances getting involved, rather than a flurry of retail investors,” said Nic Carter, co-founder of researcher Coin Metrics.

The largest cryptocurrency spiked above $13,000 last week for the first time in over a year following an announcement from PayPal that customers will be allowed to buy and spend digital currencies on the platform. Bulls cheered the development, with many saying the move suggests greater mainstream acceptance. The cryptocurrency slipped from session highs and was down 0.8% to $13,506 at 7:18 a.m. on Wednesday in New York.

“PayPal’s announcement will help to educate millions of people about the value of Bitcoin and digital assets to their lives, their wealth and freedom,” said Guy Hirsch, managing director of U.S. for the eToro trading platform. “We are very excited about the news and looking forward to seeing other major payments apps get into the space.”

PayPal’s news came amid several signs that traditional financial groups are leaning into cryptocurrencies.

Fidelity Investments launched a Bitcoin fund over the summer, becoming one of the most-prominent firms yet to express interest in crypto. Public companies Square Inc. and MicroStrategy Inc. have also recently invested in the coin. The European Central Bank said it will start experimenting with a digital version of the euro, as China continues to ramp up testing of a digital yuan.

While some countries have started to express interest in creating digital currencies, there is little evidence to support claims that crypto will displace fiat currencies anytime soon. Mike Novogratz, founder and chief executive officer of Galaxy Investment Partners, argues that the token serves as “digital gold” and is a long way from everyday use.

In a Bloomberg TV interview, the prominent Bitcoin investor said he didn’t think the token will be used as a transactional currency anytime in the next five years, but is instead used as a store of value.

Bitcoin Is Back Trading Near Three-Year Highs

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