After a three-year hiatus, cryptocurrencies have returned and are attracting the attention of investors. Will this time be any different?
Readers may recall the Bitcoin craze that sent the largest digital currency to an all-time high of $20,000 in 2017 and spawned numerous copy-cat cryptos like Ethereum and Litecoin.
You may also remember that all of them came crashing back to earth and ignominy where they have languished, unloved, until this year.
This week, Bitcoin hit a new three-year record of $19, 857. If that is news to you, there is a reason for that. After the last buying frenzy and subsequent crash, the financial media has taken a more cautious approach in touting cryptocurrencies. Until recently, Bitcoin has barely been mentioned in the press.
Another big difference is the number of new Bitcoin. More and more companies, many of them traditional financial institutions, are taking an interest in using and trading Bitcoin, and other digital currencies such as Ethereum and Litecoin. JPMorgan Chase & Co., as well as several other Wall Street firms, have expressed more than a passing interest in owning and trading these currencies.
In addition, more and more firms are accepting Bitcoin as payment. As of mid-year 2020, more than 160 companies allow their customers to pay with Bitcoin, including such heavy hitters as PayPal, Microsoft, AT&T, and Shopify. And it is no longer just the retail investor and "hot money" guys who are buying and selling crypto. A growing number of institutional investors are dipping their toes into the arena in search of better returns. Simply parking their spare cash in a money market fund (where it earns next to nothing) is not an option for many.
In one recent famous incident, a public company in business intelligence, MicroStrategy Inc., announced in July a new strategy in which it would invest its substantial excess cash into various assets instead of low-yielding money market funds. They chose Bitcoin as one of those alternative assets.
At last count, the company held 38,250 Bitcoin with an aggregate cost basis of $425 million. It is worth more than $730 million today. As a result, many traders have used the company's stock as a proxy to play Bitcoin. The share price has often tracked the price of Bitcoin rather than the fortunes of the company's main business. Other investors are identifying listed companies with any exposure to cryptocurrencies. In some cases, traders are bidding up their stock prices by more than 100 percent.
The same thing happened on the last go-around with cryptos. So why is this time any different? Aside from the big bets that respected investors like Paul Tudor Jones and Stan Druckenmiller and other institutional players are making, the overall environment has changed.
Most risky assets are already at record highs. Low interest rates provide little to no return and, according to the Fed, will remain that way for the foreseeable future. Then there is the U.S. dollar, which is dropping like a rock, making lower lows almost very day.
Does that mean cryptocurrencies are somehow a better bet than they were three years ago? No. I expect the volatility that easily cut Bitcoin in half in a matter of weeks could happen again tomorrow. The digital currency markets, while maturing, are nowhere near stable, and won't be for a long, long time. It is not a market for the faint of heart. Over Thanksgiving and into Black Friday, for example, Bitcoin dropped more than 10 percent in 36 hours. It bounced back by Monday, but you catch my drift.
As for me, I have added cryptocurrencies to investments I will now follow daily, because I do believe that this asset class will become more meaningful over time. If you are itching to purchase, my advice is to wait for a pullback, which should come somewhere between $20,000-$25,000 Bitcoin. I would except a 20-30 percent decline, so wait for it!
Bill's forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at email@example.com.
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