Cryptocurrencies have seen dramatic recovery in their prices over recent months – but is it different this time?
Bitcoin, currently priced at $8,508 (£6,725) according to data site cryptocompare, is trading at 12-month highs after staging a dramatic price recovery since the beginning of April.
It hasn’t been lost on investors looking to reposition their portfolios for more uncertain economic times that bitcoin is the best-performing asset this year by some considerable margin, having risen 122% since January.
Also, its proven negative correlation with equities in recent months is making it stand out from the crowd.
Being crypto, the exact reasons for the ending of the bear market that took hold in December 2017 are open to debate.
The institutions are buying
The market bottomed late last year at lows of $3,195, so the unwinding of the speculative mania that saw the prince touch $20,000 (£15,810) may have simply run its course as the weight of sellers dissipated.
However, a number of other factors have come into play to put a floor under the price.
While retail investors (or should that be speculators?) were exhausted by the bitcoin rollercoaster, institutions, it appears, were just getting started.
US asset manager Fidelity, with $2.46 trillion in assets under management, led the way when it announced the setting up of a custody business, with its Fidelity Digital Assets now up and running.
Then there is the Bakkt crypto platform initiative from Intercontinental Exchange, the owner of the New York Stock Exchange. Bakkt plans to launch a ‘physically settled’ bitcoin futures product (which means actual bitcoins will change hands, as opposed to the existing futures contracts from CBOE and CME that are ‘cash-settled’), in addition to custody and payments services. It has signed up Starbucks and Microsoft as partners.
US investment bank JPMorgan, whose chief executive Jamie Dimon famously described bitcoin as “a fraud”, is launching its JPMCoin, which the bank says is “designed to make instance payments using blockchain technology” in a major vote of approval for the nascent asset class.
Staying in the US, Grayscale Investments, the issuer of the Grayscale Bitcoin Trust, has reportedly been acquiring a fifth of the total monthly supply of bitcoins as its regulated vehicle expands to approximately $2 billion in assets under management to meet demand from institutions and high net worth individuals.
‘Digital gold’: store of value
Although bitcoin has failed to gain traction as a medium of exchange, it is now touted as “digital gold”, a store of value.
The thought that such a speculative asset class could be a store of value would have been laughed out of court just a few months ago, but is now being taken seriously against the backdrop of worries on the US-China trade dispute and the threat it poses to global growth and equity markets more broadly.
Haven asset or not, a growing number of investors have come to see it as such. And it’s not just in crisis-hit economies such as Venezuela, where usage as store of value is at an all-time high as it is elsewhere in Latin America. Turkey, for instance, has seen spikes in trading volume as the government battles to defend the value of the lira.
And in China, the depreciating yuan may be pushing at least some Chinese investors into the over-the-counter market to buy bitcoin as a way of protecting asset values and as a vehicle for effecting capital flight.
Where Facebook goes, others will follow
In terms of the progress the technology behind bitcoin – the blockchain – is making, there have been some positive developments here too.
Since the end of last year, reports have been leaking out of Facebook about the launch of its own cryptocurrency.
Just last week the BBC revealed that Facebook was developing a “GlobalCoin” to power a payments system across its various social media and messaging properties, which together have 2.3 billion users.
Facebook wants to make payments easier and cheaper, starting probably with remittances.
Bloomberg had previously reported that Facebook was launching what is known as a “stablecoin” in crypto lingo – a cryptocurrency whose value is pegged to another asset, typically a normal government-issued ‘fiat’ currency. Facebook is thought to be linking its coin to the dollar, euro and the yen.
The coin will not just power payments but also be a way of monetising activities such as user-created content, so Facebook users could be rewarded for posting popular content say, or for watching adverts.
The BBC reported that Mark Zuckerberg has met with Bank of England governor Mark Carney to discuss the no doubt considerable regulatory issues and there have been meetings between Facebook executives and US Treasury department officials.
Facebook’s crypto move is likely to see competing tech (and financial) firms hurrying to ready their own crypto offerings.
Next stop $10,000?
Although further deep price pullbacks are likely because of the immature nature of the market, the price is expected to breach $10,000 before too long.
Reaching that level could set off another round of FOMO – fear of missing out – among retail investors and speculators, says Thomas Lee, formerly JP Morgan’s chief US equity strategist and the founder of Wall Street analyst Fundstrat.
Mark Mobius, formerly of Templeton Emerging Markets and the founder of Mobius Capital Partners, told CNBC recently: “There’s definitely a desire among people around the world to be able to transfer money easily and confidentially… and that is really the backing to bitcoin and other cryptocurrencies of that type.”
When the likes of Mobius, who was previously dismissive about bitcoin’s prospects, says: “I believe it’s going to be alive and well”, it means bitcoin is here to stay and it’s probable that a handful of the other 2,000 or so cryptocurrencies vying for attention out there will also succeed.
Other coins to watch
Ethereum, the first crypto platform that was designed to run applications called smart contracts, is seen as one to watch.
Microsoft has partnered with the Enterprise Ethereum Alliance recently, releasing a developer kit for building decentralised applications (dapps) on its Azure cloud platform.
Another, EOS, created by a company called block.one and which raised $4 billion in its year-long crowd sale, has just announced a social network called Voice.
Ripple, the creator of the XRP token and the third most valuable crypto token, has plentiful partnerships with global banking groups as it seeks to gain traction for its cross-border transactions solutions. It continues to lag other top coins, still trading at 88% below its all-time high of $3.84.