We’ve heard such arguments before, of course. Most of bitcoin’s proponents argue for its role as a sort of digital gold that can hedge against inflation. But that argument ignores the fact that bitcoin’s first real brush with inflation saw it act quite differently.
It fell 75 per cent between October 2021 and November 2022 as inflation in the US rose to higher than 8 per cent from about 5 per cent. And it’s only as inflation has retreated towards 3 per cent this year that bitcoin has taken off.
Still, it is worth noting that bitcoin has risen this year despite the higher-for-longer narrative that has pervaded markets for much of the year, and in the face of a regulatory crackdown that has ended the careers of two of crypto’s most high profiled figures: Sam Bankman-Fried and Binance’s Changpeng Zhao.
Indeed, there is a view that the crackdown has helped drive the buying, and prepare the ground for regulatory approval of the first spot bitcoin ETF, which has been talked about for much of the year.
The argument is that such an ETF would give institutions the confidence to increase their investment in bitcoin in a safer way.
Ark Invest’s Cathie Wood told this column last month that her firm’s research suggests the average portfolio should have an allocation of between 2 per cent and 6.5 per cent in the cryptocurrency; certainly the creation of a spot ETF would make such an allocation easier.
Another boost for sentiment is the so-called bitcoin “halving”, which occurs about every four years and halves the amount of tokens that bitcoin miners receive as reward for their work, increasing the scarcity of a currency that will only ever have 21 million units. Halving events in 2012, 2016 and 2020 were followed by bull runs in the price.
All in all, it’s little wonder the likes of Armstrong are feeling inspired to declare crypto can save civilisation. But investors prepared to get in on the hype should be careful.
First, the surge over the last six weeks or so does have a strong whiff of irrational exuberance about it; the spot ETF speculation is clearly strong, but further delays to approval by US regulators could result in a sharp swing in sentiment.
Second, bitcoin has really taken off as hopes of rate cuts have grown. But the everything rally that we have experienced across asset classes has loosened financial conditions, and labour markets and consumer spending remain robust. We may not see further hikes, but the higher-for-longer narrative isn’t dead yet.
Third, remember that investing in bitcoin requires a strong stomach. Since 2017, we’ve seen four major drawdowns of 83 per cent, 71 per cent, 54 per cent and 77 per cent. Yes, the gains over longer periods (up 1132 per cent over five years, up more than 12,000 per cent since 2015) are spectacular, but the volatility that comes with it can be more than some investors can take.
