Please be there, please be there……that is likely to be the panicked refrain of all those people who are now searching down the back of the sofa or digging around into the dusty recesses of their desks…no, not for some spare change, but for that old flash drive, the one where they put that wallet address with the alphanumeric code for that “new digital currency thingy” their friends convinced them to purchase many moons ago. Fear is echoing in their heads as they worry they’ll have missed one of the wildest rides of their lifetimes and their chance at riches…that it will all end in disappointment like the characters on the Big Bang Theory who transferred their bitcoin to another drive that, unknowingly, was lost years ago.
As Bitcoin hits the $100,000 mark, an amount that many in the global investment community never thought would happen, it’s time to look back at how one of the most unusual of assets got to this point and why, given that it is not a traditional currency or asset in any way. It doesn’t pay a yield or a dividend or even provide a claim to anything other than itself. What we do know about Bitcoin is its volatility. It has experienced several massive rallies and spectacular crashes since it first became available back in 2009, increasing from being worth only fractions of a penny. In fact, it was considered of such little value when it was first created that, now infamously, on 22 May 2010, programmer Lazlo Hanyecz paid 10,000 Bitcoin for two Papa John pizzas worth about $25. The Bitcoin was then worth around $41. Today those 10,000 Bitcoins are worth over a billion dollars. This means that, in retrospect, those were probably the most expensive pizzas ever!
Bitcoin’s price jumped as the word spread about this new digital currency and it rose to $29.60 on 8 June 2011 before spectacularly crashing downward to settle at under $5. It began its recovery in 2013, surpassing $1000 for the first time. However, the price dropped quickly afterward after China banned its financial institutions from trading in Bitcoin. It then stagnated for about two years before managing to hit the $1,000 mark again. It then began to rise from there as exchanges developed to handle the majority of Bitcoin transactions and started onboarding more users. As a result, crypto became more accessible to the average retail investor. In 2014 one of the largest exchanges, Mt. Gox experienced a security breach with hackers stealing $60 million. This caused it to shut down and resulted in another Bitcoin slump. But the news around this attack meant that the genie was out of the bottle and investors developed a fear of missing out (FOMO). Futures contracts began trading on the Chicago Mercantile Exchange (CME). Bitcoin rose to $10,000 in November 2021 before rising yet again, this time to over $19,000 by the end of December 2017. Nevertheless, Bitcoin’s fortunes continued to wane in and out, with various periods of growth inevitably followed by sudden plunges. And one of the worst plunges was caused by the Covid pandemic. As stock markets fell so too did Bitcoin, crashing to below $4,000. However, like the equity markets, it was saved by the Fed’s expansionary monetary policy, which caused asset prices to rise. By the end of 2020 it was worth more than $29,000. It continued to climb through 2021, hitting over $69,000 in November 2021
But, inevitably, the downside came. Bitcoin plunged once again in 2022 following the collapse of the cryptocurrency exchange FTX and the subsequent loss in confidence by investors. The Fed also began its battle with inflation caused by fiscal transfers, low interest rates, and supply constraints in June 2022, by engaging in quantitative tightening and consistently raising interest rates.
It took until late 2023 for the effects of tighter monetary policy globally to really be felt. This resulted in another Bitcoin resurgence with it reaching over $49,000 by the end of the year.
During 2024 Bitcoin has continued to grow, fuelled not only by keen retail investor sentiment, but by the introduction of Bitcoin ETFs. This meant that Institutional investors could now get in on what was turning out to be the fastest growing asset class in the world. The SEC had previously attempted to block ETFs from investing in Bitcoin, citing investor protection concerns, but the products have allowed more investors to safely gain exposure to Bitcoin. In fact, more than $4 billion has flowed into US-listed Bitcoin ETFs since the 5 November election.
Is all that glitters truly gold?
Bitcoin has often been called “digital gold” but it hasn’t performed in quite the same way. Although both may be considered “rare”, with Bitcoin designed to have a maximum supply of 21 million bitcoins after which no new bitcoins can be mined and supplies of gold also being limited, with only about 50,000 unmined tonnes remaining, according to the US Geological Survey, they differ in terms of investor psychology. Gold has historically been an asset that holds its value over long periods. It has been used to hedge against inflation, against currency risk, geopolitical risk, and general market downturns for centuries. Bitcoin, although appearing to become embedded in the modern portfolio allocation infrastructure, remains unproven as a truly long term investment. However, patient cryptocurrency investors have used it successfully to hedge against market corrections and recessions. Yet, despite the demand for gold being diverse as it can be used in a number ways: to generate returns, protect wealth, for jewelry, and for industrial goods, and the demand for Bitcoin only coming from one source, investors, it has outperformed gold for the majority of the past decade. And the reason for this, for many investors, is simple; unlike gold, Bitcoin is verifiable, independent of any government, divisible, and can be easily transferred across the globe with a stroke on a keyboard. In short, no mess, no bother.
But what about other asset classes?
Equities have “always” been the safer bet compared to Bitcoin, haven’t they? Well, not quite. Although Bitcoin has historically been viewed as a high risk asset, it doesn’t mean that equities are necessarly the safer bet for investors. Equities are subject to other types of risk, including credit risk, foreign currency risk, liquidity risk, political risk, and economic concentration risk.
As it turns out Bitcoin has, on a cumulative basis, outperformed the S&P 500 since 2014 with a performance of +11.474.5%. In comparison, the S&P 500’s cumulative performance ws a measly +221.9%.
And it isn’t just on a cumulative basis that Bitcoin has outperformed. Despite being a far more volatile asset class, it has managed to outperform the S&P 500 in 7 of the past 10 years.
Is Bitcoin’s biggest bang still to come?
Without a doubt, Bitcoin has seen one of its most important big bang moments since the re-election of Donald Trump as US president and the Republican sweep of Congress. This is because of the more positive regulatory regime expected under a Republican-led government. There have been promises of making the US the crypto capital of the world and of establishing a strategic Bitcoin reserve. President-elect Donald Trump had repeatedly stated that he would fire the head of the Security and Exchange Commission (SEC), Gary Gensler, whose views on regulation have been considered a hindrance to the development of Bitcoin and other cryptocurrency products. And, with news on 21 November that Gensler is due to leave office on 20 January 2025, the day that Trump is (re)sworn into Presidential office, there is now increasing hope among investors that more crypto products will be approved under the Trump administration in addition to that lighter regulatory touch that will make finding banking partners easier. Even though the economy may show signs of strain in the months to come as inflation increases if Trump’s tariffs and tax cuts come into being, there’s still a very strong chance that Bitcoin will continue to rally. The mood has shifted in how investors think about asset classes. How high Bitcoin might go is, of course, subject to a variety of factors, but crypto enthusiasts such as ARK Invest CEO Cathie Woods has predicted Bitcoin to hit $1.5 million by 2030, in a bull case scenario. Nigel Green, CEO of financial advisory firm deVere Group, told the UK’s “The Independent” newspaper that “the growing narrative of Bitcoin as digital gold is becoming impossible to ignore. It’s increasingly viewed as a hedge against inflation and a tool for portfolio diversification. Institutional interest is at an all-time high, and the infrastructure to support mass adoption continues to expand.” According to a 22 October report by Bernstein Research, it could go as high as $200,000 by the end of 2025 as the cryptocurrency enters “a new institutional era.” What is clear is that with regulatory change on the relatively near-term horizon, this will likely draw in even more institutional investor demand, potentially making this Bitcoin milestone seem more like a small poof than a big bang.
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