Markets have taken a nosedive lately as President Trump ramped up his trade war with China but one asset class making hay is bitcoin. The digital currency just hit $8000, its highest for 10 months, on the same day the Dow Jones plunged 617 points when the US hiked tariffs on $200 billion worth of Chinese goods.
The move has sparked fervour among traders and investors who had taken a bath on the cryptocurrency in 2018, when it fell from nearly $20,000 to just $3000.
As ever with bitcoin, the exact reason for its rise is hard to pinpoint, and far-fetched rumours spread around online chatrooms, including that customers at ailing Metro Bank had taken their money out and put it straight into the cryptocurrency.
But experts say a more plausible explanation is that investors in places such as Turkey, Argentina and China, which are all closed economies and suffering wild domestic currency fluctuations as a result of geopolitical unrest, have resorted to bitcoin to get their cash out of the country.
Marcus Swanepoel, chief executive at trading firm Luno, said: “It is certainly being used in some countries where the currency has been deteriorating rapidly. They use it as a hedge to stop their life savings losing value. In China, where there are heavy capital controls, it is being used to take money out.”
Another reason for the sudden spike in price is that mainstream institutions like banks and funding houses have recently announced plans to enter the trading market, lending the asset some much-needed credibility. This month Fidelity said it will buy and sell bitcoin for its customers within a few weeks.
The asset management giant created Fidelity Digital Assets in October last year in a bet that digital currency is here to stay and should be taken seriously.
Recent analysis by the fund manager shows 47% of institutions believe digital assets have a place in their investment portfolios, a significant uptick from a couple of years ago when it was viewed as untrustworthy. Fidelity will offer over-the-counter execution and target institutions rather than retail investors, a world away from the geeks in their bedrooms who first mined the currency in 2008.
Other banks thinking of doing the same include Citi’s Ventures arm, ING and Rabobank. Analysts say they are drawn by the volatility, as price fluctuations are how traders make their money.
Etoro’s senior market analyst Mati Greenspan said in a note: “The volatility is one of the most attractive qualities of crypto from an asset manager’s perspective. Just as I in my portfolio am holding about 3.5% in emerging markets, I believe one day soon asset managers around the world will diversify with crypto.”
Even its fiercest sceptics such as renowned fund manager Mark Mobius have come on board, publicly stating bitcoin will be “alive and well” in the future and saying “there’s definitely a desire among people around the world to be able to transfer money easily and confidentially”.
Finally there is a theory that investors now view bitcoin as a more favourable option than gold, which is traditionally where people park their cash when global politics and markets become fraught. One bitcoin trader said: “It’s ironic that a high-risk asset class has become a safe haven but it has many of the same qualities as gold.”
When it was first founded bitcoin was modelled on gold and like the precious metal it has a finite supply, can be broken into smaller pieces and is hard to mine. Swanepoel explains: “Like gold, man has put value in its storage qualities. Ultimately gold is not useful though and is hard to move, whereas bitcoin can be used to make payments.”
Nevertheless many still urge caution, stating that the currency is still plagued with fraud, theft and regulatory issues. The latest high-profile case involves the New York attorney general accusing Bitfinex, one of the largest bitcoin exchanges, of hiding the disappearance of $850 million of clients’ bitcoins.
In Europe, Interpol is seeking suspects on behalf of Austrian authorities, who are investigating an alleged bitcoin scam that affected as many as 10,000 investors in the country.
Only this week the Financial Conduct Authority warned of £27 million lost in crypto and bitcoin scams in the past year, with victims losing nearly £15,000 each on average.
These stories and others should serve as a cautionary tale for investors after the bursting of one bubble already in the past year.
Bitcoin may be the current flavour of the month in trading markets, but whether it can yet be fully trusted is still up for debate.