By Samuel Indyk & Robert Zach
Investing.com – The two largest cryptocurrencies by market cap, Bitcoin and Ethereum, reached new record highs on Tuesday as global inflation fears and the ongoing era of cheap money continue to support prices. The Fed’s decision last week to taper asset purchases but signal no imminent rate rises appeared to be the latest catalyst for a move higher.
“The recent surge in the crypto asset partly seems to have been caused by investors piling in, seeing it as a hedge against inflation,” said Hargreaves Lansdown (LON:HRGV) Senior Investment and Markets Analyst Susannah Streeter in an emailed note. “Some appear to have been enticed by the argument that the huge monetary stimulus programmes unleashed by the central bank is fuelling inflation which will see the value of money decrease over time, whereas Bitcoin has a fixed limit on the number of coins which can be created.”
Indeed, the maximum number of all Bitcoin that will ever exist is 21 million units, whereas central banks have the capacity to print an unlimited amount of money.
Musk announcement
Another potential reason for the recent surge is the news that Tesla (NASDAQ:TSLA) CEO Elon Musk is set to sell 10% of his Tesla holdings, following a weekend Twitter (NYSE:TWTR) poll. If he carries through with his promise, there is some speculation that Musk may reinvest some of the proceeds into cryptocurrencies. Previously, Musk has stated that he personally holds Bitcoin, Ethereum, and Dogecoin.
Fed warning
The recent Financial Stability Report from the Federal Reserve has done little to dampen the appetite for crypto assets. The report, released yesterday, solicited views from a wide range of contacts on risks to financial stability, including professionals at broker-dealers, investment funds, political advisory firms, and universities.
Cryptocurrencies and stable coins were seen as the fifth most cited potential shock to financial stability over the next 12-18 months, after persistent inflation & monetary tightening, vaccine resistant variants, China regulatory & property risks, and US-China tensions.
However, the report itself did little to suggest that the crypto industry could become a major threat to US financial stability, with the report noting that the view into crypto markets is “limited”.
Where next for Bitcoin?
Mikkel Morch, executive director at cryptocurrency hedge fund ARK36, said $70,000 for Bitcoin “seems imminent”, according to CNBC.
However, Streeter is more cautious and has provided a warning to some investors.
“The US central bank, the Federal Reserve has [...] started gently reining in its bond purchase programme, and could well tighten more sharply in the months to come, potentially triggering a mini sell off, similar to how the financial markets would react if the drug of cheap money is withdrawn too quickly,” Streeter said. “The perturbations at work in the crypto stratosphere, given the gyrations of coins and tokens over recent months, means investing in Bitcoin is not for the faint hearted or for those with no money to lose.”