Bitcoin is back, defying the sceptics and hitting a new record.
For most seasoned investors crypto is an intriguing sideshow. But It would be a mistake to ignore what is happening with bitcoin
Over the past year it has become a legitimate, if highly speculative, new area of investment.
As Paul Hewson, the digital asset lead at KordaMentha puts it: “The narrative around cryptocurrency is changing as investors see new pathways into a new asset class.”
After several “cycles” where Bitcoin rose, dropped like a stone, and then rose again, it is now clear crypto is here to stay. It just happens to be, as one analyst put it, “the riskiest of all risky asset allocations”.
The key point for the traditional investor is that far from being an alternative to sharemarkets, bitcoin is now just another choice within conventional investment markets.
No less an august institution than the US-based CFA Institute recently concluded that “bitcoin was at one time touted as a hedge against sharemarkets and as a potentially uncorrelated addition to portfolios, but its growing correlation to the S&P 500 indicates otherwise”.
Specifically, bitcoin is correlated to growth shares. Look at the performance over year to date; the ASX is up 1 per cent, Wall Street’s S&P 500 is up 7 per cent and bitcoin is up more than 50 per cent.
We can safely assume that if the sharemarkets were going in the other direction then bitcoin would be down too.
Bitcoin’s new record topping $US69,190 this week was actually preceded by an Australian dollar price record days earlier – but it is the US moves that matter.
What’s more, the futures market for bitcoin suggests this latest run has some way to go, with options hitting levels closer to $US80,000.
Two factors are key to the latest lift: First, the upward swing in US markets where the correlation to bitcoin has now been clearly established.
And second, the benign supply and demand equation now falling into place.
On the demand side there is the arrival of money from mum and dad in the form of huge inflows to US-listed exchange traded funds, which were only approved in January this year.
On the supply side, there is the potential reduction in supply next month when bitcoin has one of its so-called “halvings”, which is when the reward for bitcoin miners is cut in half.
It’s worth noting that the sign-off for Wall Street-listed EFTs came by way of a court order for US operator Greyscale Investments, which meant the all powerful Securities and Exchange Commission had little choice but to wave through the new category of bitcoin-based products. In turn this allowed the US mainstream financial advice business to recommend bitcoin products.
In our market the conversion of mum-and-dad investors to crypto is still some way off. There is a lot of hype about a queue of Australians bitcoin ETFs ready to go on the ASX but there is little evidence of any hard progress.
In fact, Arian Neiron, the chief executive of ETF house VanEck Asia Pacific, has said that approval is not imminent. VanEck is clearly trying to push the regulators into action, after submitting its first application three years ago and resubmitting a fresh application for an ASX-listed ETF in February this year.
According to Neiron: “There are still a number of hurdles from a regulatory and exchange perspective that must be worked through.”
For now, the path to crypto, where traditional safeguards are in place, is largely restricted to US listed EFTs which are on offer from most of the larger Australian online brokers.
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