Bitcoin: tulipmania or the store of value for the new millenia?

After JP Morgan Chase & Co. strategists reported the cryptocurrency could reach $146,000, WP presents contrasting views

Bitcoin: tulipmania or the store of value for the new millenia?

Bitcoin continues to be the investment industry’s swaggering upstart, derided by some, not trusted by many but undoubtedly making its volatile mark.

The past few days have offered a microcosm of how the cryptocurrency is covered in the media; screaming headlines on Sunday as it hit a record US$34,000 followed by reports of it fizzling out on Monday as it dropped as much as 17%, the most since March. It was back on the podium yesterday, hitting a new high of $35,842. The swings are a reminder of its notorious volatility, with its price nevertheless having more than quadrupled over the past year.

This week, JP Morgan Chase & Co. strategists told Bloomberg that Bitcoin had the potential to reach US$146,000 in the long term as it competes with gold as an asset class. The cryptocurrency’s market capitalization of around US$575 billion would have to rise by 4.6 times to match the total private sector investment in gold via exchange-traded funds or bars and coins.

The strategists, led by Nikolaos Panigirtzoglou, said this outlook depends on the volatility of Bitcoin converging with that of gold to encourage more institutional investment, a process that will take some time.

“A crowding out of gold as an ‘alternative’ currency implies big upside for Bitcoin over the long term,” the strategists said. However, “a convergence in volatilities between Bitcoin and gold is unlikely to happen quickly and is in our mind a multiyear process. This implies that the above-$146,000 theoretical Bitcoin price target should be considered as a long-term target, and thus an unsustainable price target for this year.”

The report said that more institutions and noted investors, from Paul Tudor Jones to Scott Minerd and Stan Druckenmiller, have either started allocating funds into Bitcoin or have said they’re open to doing so. The bulls stress that Bitcoin offers a hedge against dollar weakness and inflation risk but the bears – and there are some strident ones - say retail investors and trend-following quant funds are pumping up an unsustainable bubble.

Nick Barisheff, the founder and CEO of Bullion Management Group, told WP he doesn’t believe gold’s status as the ultimate safe haven asset is under threat. He believes it remains the most negatively correlated asset to traditional financial assets, like stocks, bonds, and even real estate. As for Bitcoins rising valuations, he dismissed it as a fad and "tulipmania".

He said: “While Bitcoin is a single crypto, it’s still an artificial currency with nothing backing it. The limitation on the creation of new cryptos is one benefit over the conventional fiat currencies but the trouble is there are hundreds of cryptocurrencies, so when you look at cryptos, you have to look at them all in combination. And when you look at them all in combination, they're expanding faster than the central banks are printing money.

“The other issue with cryptos is that because of their low transparency, the bad guy starts using them; the money launderers, the drug dealers, and the pornographers. Then the authorities come knocking and arrest everybody, and they've already done that several times.”

Arthur Salzer, CEO and CIO of family office Northland Wealth Management, underwent a detailed analysis of Bitcoin before implementing an investment strategy that has added a “ton of alpha” and returns above 100%.

He respects Barisheff’s views – particularly on sound money - and said there are many elements to the argument. However, he told WP that rather than a fad, cryptocurrency is a money or store of value for the new millenia, and that it appears to be in the process of becoming recognized by market participants as a “digital gold”.

He said: “”At the current time, the stock-to-flow of Bitcoin and gold is approximately the same after the most recent 'halving' of Bitcoin last year. Three and a half years from now, the stock-to-flow of bitcoin after the next halving will be superior to gold and then so on every four years after that until all the Bitcoin is mined. In essence, Bitcoin is a 'harder' form of money than gold. 

“In addition, the ability for almost anyone who has a smart phone and/or inexpensive home computer in the world to be able to buy, store and use Bitcoin is superior to gold. Just try to buy gold and to verify its purity. Assaying gold is a tricky process. A Raspberry Pi - a cheap computer, under $100 - can run a full Bitcoin node and you can self-verify at home.”

He also highlighted the institutional-quality onramps that have been created over the past three years in regards to Bitcoin, with the likes of Fidelity, TD (thru its investment in ErisX), Statestreet, BNY Mellon, JPM, Microsoft, Paypal, Visa and Mastercard all working on improving the user experience for investors.

As a nascent asset class, the trend has seen higher highs and higher lows during this period. However, Salzer said volatility has been declining, albeit it remains much higher than a mature asset like gold.

He said: “There is a reason for the saying ‘Long Bitcoin, short the bankers’ throughout the Bitcoin community.

“Looking forward, it would be of no surprise if Bitcoin's market cap exceeded that of the world's total holdings of gold over the next decade, as well as coming closer to the market caps of other asset classes such as real estate, equities and fixed income in the decades to come.”