Bitcoin has been a fantastic performer during the global pandemic, outstripping many other investment classes.
Since the beginning of the year, Bitcoin’s value has more than doubled with a 130% rise, setting it apart from most alternative investment classes during a time of great uncertainty.
So, what is the key to the stellar performance of the biggest digital currency and can this trajectory continue?
Here we look at five reasons why Bitcoin in now zeroing in on a new, all time high which provide some explanations for the digital currency’s ability to continue an impressive bull run.
In a world in which almost every central bank is printing money and employing quantitative easing with an enthusiasm which is literally shocking, Bitcoin stands out as a much more disciplined currency with a strong scarcity value.
Unlike those major central banks – including the US, Japan, Europe and Australia – Bitcoin is a model of propriety and certainty.
There will only ever be 21 million virtual “coins” in existence, which makes Bitcoin more like gold or another precious metals than paper currencies because the supply is strictly limited and there is an inbuilt “value’’ due to the cost of the significant computing power needed to “mine” coins.
While there is no doubt Bitcoin has been very volatile over its existence, rising to its all-time peak of $27,000 in 2017 before collapsing to just $8,000 within a few months, the current rally which is once again approaching that all-time high has been much more broad-based and less speculative.
As Bitcoin gets ever closer to finishing its “coin mining” phase, the scarcity value of each Bitcoin will perhaps become more appreciated.
Search for returns
Another factor driving the Bitcoin surge is the search for returns.
One of the desired results of the unprecedented amount of liquidity being pumped out by central banks has been a flattening of interest rates towards zero, effectively slashing risk-free returns.
As interest rates have fallen, that means other asset classes such as shares and property are being bid up so that their yields also flatten downwards – although obviously not to the same extent as the risk-free return.
In other words, there is nothing extraordinary in the current environment for a share that once yielded a dividend of 8% to move up in price so that the dividend yield moves to 4%.
While Bitcoin does not yield anything, it has certainly made some significant capital gains which over recent months would blitz the returns on many other asset classes.
One thing that has changed since the 2017 Bitcoin boom and bust is that institutional investors have really entered the arena which was once dominated by individuals.
In the intervening years, institutional investors have become more comfortable with Bitcoin and cryptocurrencies in general so it has moved firmly into their investment universe.
It is not hard to see why.
In the past few months, any hedge or listed fund that had invested between 1% and 5% of its assets in Bitcoin would have outperformed its competitors, assuming the rest of the portfolio was identical.
Those sort of higher risk/higher reward options are ideal for making up a small percentage of an investment fund, adding much needed fizz to the overall returns.
Retirees and other investors joining the party
Institutions are not the only new investors in Bitcoin, with retirees, self-managed super funds and a much wider range of individual buyers also joining the party.
In the past, the typical Bitcoin investor was a man, skewing young with a technology bent or a high-risk tolerance.
Retirees and self-managed super funds are traditionally at the opposite very safe end of the risk spectrum with large holdings of cash.
They have been forced up the risk spectrum by the crushingly small yields on bonds and term deposits and just like some institutional investors they are looking to park small percentages of their overall investments in areas that may produce high returns.
There is also the possibility that Bitcoin could become a very long-term investment, if you are prepared to put up with price volatility.
The world has changed but Bitcoin is a reminder of better times
In a world in which central banks – with the possible exception of China – seem to be more interested in reducing the level if their own currencies and crushing bond yields to remain internationally competitive and sustain some economic growth, there is an understandable move towards Bitcoin which looks like a paragon of virtue by contrast.
Bitcoin doesn’t have to worry about supporting economic growth and trying to push up inflation and employment so it can easily stick to its ceiling of 21 million virtual coins.
In doing so, it is a wonderful reminder of a bygone era when central banks saw themselves in a similar light, trying to snatch away the punch bowl just as the party gets going.
Now those same central banks are more than happy to print another trillion dollars just so they can attract some friends to keep on dancing.