Since its introduction, a few years earlier, Bitcoin created a revolution the likes of which never seen before. Even its’ biggest fans did not anticipate the stunning rise seen in Bitcoin against the USD – it reached almost $20,000 in December 2017, literally from zero.
Bitcoin’s popularity and fame led to the expansion of the crypto industry in ways not imagined. Thousands of new coins appeared out of nowhere, each of them promising to be the new Bitcoin. They were not.
Bitcoin and Investment
Like in life, there is nothing risk-free. Even the most astute risk management program is not free of losing it all. Risk management, on the other hand, deals with the process of defining the risk and finding the vehicle that best suits the investment thesis.
In the financial world, when buying risk, investors refer mostly to equities. Otherwise, the traditional “risk-free” investment is the Fed’s 10y Treasury. So, risk, buy stocks – no risk, buy bonds. Where does Bitcoin fit in?
Bitcoin attracted speculators and investors because of its wide fluctuations. The possibility of gaining 30% or more on your investment in a single day appeals to many speculators.
However, the same fluctuation may go against an investment. But holders (i.e., people that buy Bitcoin with the intention of holding on it for the very long term) see only the upside – they go long initially, and then simply add on any pullback, having in mind the longer-term goal. They are believers.
In the investing world, something changed with Bitcoin lately. Up until the coronavirus crisis, it was viewed as the “digital gold” –a safe-haven asset investors would buy for diversification purposes.
However Bitcoin, at least in 2020 so far, became closely correlated to the United States stock market. It reflects a risk-on/risk-off investment thesis, just like when investors decide to go in and out of stocks.
Last week’s Paul Tudor Jones endorsed Bitcoin. The famous investor revealed that he holds 1-2% of its assets in Bitcoin, sparking the imagination of Bitcoin holders. After all, an endorsement like this may mean that, for once, institutional investors finally accept that Bitcoin is here to stay, and as just another way to diversify the portfolio.
If that is the case or not, it remains to be seen. However if Bitcoin cannot break the correlation with the stock market, it remains just a vehicle following the equity underlying.