By Geoffrey Smith
Investing.com -- The first bubble alert of 2021 hasn’t taken long to materialize.
The price of (Bitcoin) rocketed by 44% in the first eight days of the year, as investors big and small poured money into the digital currency on the back of investment bank advice sketching out the prospect of almost unimaginable gains.
As so often with Bitcoin, the rally quickly gave way to a sharp sell-off, but the dip quickly found buyers and the uptrend of the last few months remains firmly intact. With an increasing number of Wall Street’s finest lending their seal of approval to the digital currency, its momentum seems unchecked for now.
JPMorgan followed Citigroup last week in publishing research that put an eye-popping notional value on Bitcoin, based largely on the premise of it replacing gold as the preferred ‘store of value’ play for investors of the digital age.
Strategists led by Nikolaos Panigirtzoglou noted that investors still have over four times as much tied up in gold coins, bars and exchange-traded products. Shifting all that into Bitcoin would theoretically take the price as high as $148,000, they argued.
In December, Guggenheim’s Scott Minerd had used similar reasoning to slap a price of $400,000 on the currency. Yet it was Minerd, more than anyone, who contributed to one of the familiarly gut-wrenching sell-offs over the weekend by saying that the rally over $40,000 had gone too far, too fast, and that it was time to take some money off the table. Bitcoin prices subsequently fell 21% over the next 48 hours.
‘Store of value’, indeed.
In fairness, the more thoughtful Bitcoin advocates don’t make any claim to it being a store of value today. Instead, they argue, it is a status that awaits Bitcoin at the end of a long journey toward acceptance, in which early scandals of poor custody, money-laundering and wild price swings with no transparency are but distant memories.
And in some respects, the rally of 2020-21 does indeed look more fundamentally solid, in that the inflows are coming largely from institutional investors playing the long game, rather than retail investors in a hot flush of FOMO. Tellingly, this rally has not been accompanied by a rash of essentially bogus ‘initial coin offerings’ aiming to take the latecomers for suckers.
Skeptics can still argue that Bitcoin still doesn’t – and probably never will – meet fulfil of the three functions of money, namely, to act as a means of exchange and a unit of account. No major merchant will accept it, and no tax authority will accept payments in it.
Bitcoin advocates argue, with some justification, that the same applies to gold. However, the comparison only goes so far: gold has an age-old relationship with jewellery and ostentation, that has the functions of satisfying human vanity and heightening human lust in a way that abstractions such as digital currencies can’t.
However, such considerations are playing little part in a rally driven by loose central bank policy and negative returns on traditionally safe assets such as bonds. Over $18 trillion now offer negative yields, according to some calculations.
Both gold and Bitcoin prices may yet be vulnerable if central banks succeed in reflating their economies and restoring a world positive returns on safe assets. But it would be a brave investor that bet against digital currencies in the near term.