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Recent moves by institutional investors and large corporates warrant closer inspection
Wednesday 23 Dec 2020 Author: Daniel Coatsworth

Bitcoin is a marmite asset – you either love it or hate it. Hate is a perhaps too harsh a word, you either love it or ignore it. I for one have certainly paid little attention to bitcoin, considering it to be something for day traders and people desperate to make a quick buck, and not something which serious investors should pursue. Market developments would suggest I need to reconsider my stance.

I’ve been quick to dismiss cryptocurrencies in the past. My general view has been that if I want to make a return on my savings, I’ll either find a stock and study the fundamentals and form a view on where its earnings could be in the coming years, or I’ll buy an fund which provides exposure to a specific geography, sector or investment style.

Cryptocurrencies like bitcoin have seemed like gambling money away, simply believing they will go up in value but without any specific reason why. However, a closer look at bitcoin has been somewhat enlightening.

The decision by asset manager Ruffer to put money into bitcoin – as revealed last week – was significant on various levels. First, it sends a signal that institutional investors are taking the asset class very seriously. Second, it’s also interesting how institutions are following the lead of retail investors, when normally it would be the other way round.

Ruffer says it bought bitcoin as a ‘a small but potent insurance policy’ against the continuing devaluation of the world’s major currencies. It adds: ‘Bitcoin diversifies the company’s (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see.’

Gold and inflation-linked bonds are considered two of the classic safe havens, alongside cash. Bitcoin’s price is incredibly volatile and so it seems odd to have it as an ‘insurance’ diversifier. However, gold follows cycles and history tells us that its price can also experience wild swings.

There is already talk of money that would normally be held in gold now being diverted into bitcoin. The supply of bitcoin is limited, yet more gold continues to be produced by miners digging it out of the ground.

Bitcoin last week hit $23,874, quite an achievement given it was trading around $5,000 nine months ago. Admittedly we’ve seen big spikes in the past and the price has quickly fallen again, such as in late 2017 and early 2018.

Asset manager Nickel says the situation is different this time. ‘Unlike three years ago, current buying is driven by corporates, major institutional holders, dedicated funds, and retail platforms such as Square and Paypal,’ it says.

Nickel adds that several major central banks are ‘seriously considering’ the possibility of developing their own digital currencies, ‘which would provide a strong endorsement for the concept’.

The big question is whether bitcoin is going to be the next big global reserve asset. If it is then investors really do need to sit up and take notice.

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