Bitcoin Is Still Maturing As An Institutional Asset
Bitcoin emerged from the scars of the 2008 financial crisis as distrust in governments and central banks inspired the digital currency to thrive outside the establishment. Unlike traditional currencies backed by sovereign credit and taxing authority, Bitcoin has no equivalent support. This push for monetary independence found early adopters in those that wanted to transact anonymously. Then with time, it captured broader investor interest. Yesterday, Tesla announced that it has bought $1.5 billion of bitcoin, which it plans to accept as payment.
As a non-sovereign currency, Bitcoin’s value depends on its independence and scarcity. But it is also pitched as an alternative to conventional currencies in case of government mismanagement. Gold has traditionally been viewed as a safe haven against monetary disruptions. Now amidst growing interest, investors wonder if Bitcoin could become a contender.
Enthusiasm Is Expanding
Since its first debut at around $0.06 over a decade ago, Bitcoin now trades above $35,000. While it has been a meteoric rise, it has also been a bumpy ride. Retail investors, for the most part, seem unperturbed by the volatility.
In a 2019 report, Charles Schwab analyzed the top 10 equity holdings across its investor base. Across generations, Millennials had been the most enthusiastic investors. They have close to 2% of their equity holdings in Bitcoin, while Gen X and Baby Boomers seem to ignore it.
Of late, a growing number of institutional investors are showing interest. Some see its potential as an alternative to other safe havens like gold, or as a hedge against inflation.
Larry Fink, head of Blackrock BLK +0.2% BLK +0.2%, in a recent interview noted that “People are fascinated about it. It could be another store of wealth. But right now, it’s still untested. It has huge volatility.”
These comments encapsulate the broader institutional perspective. Over the last decade, Bitcoin has shown resilience. However it is still in the early stage of price discovery, as there is still no general agreement on what fundamental factors drive its value. That leaves it to momentum trading and sudden shifts in sentiment to dictate price, which has made it look more like a speculative novelty.
Bitcoin As An Institutional Asset Class
Bitcoin has similarities to gold. It was initially conceived as insurance against the risk of any nation recklessly printing money and stoking inflation. Neither asset pays income, leaving appreciation as the only return. Both are scarce and need to be mined, which gets harder and more expensive over time.
Irrespective of its conceptual similarities to gold, Bitcoin is considerably more volatile. Its rolling monthly volatility over the last five years has dropped from its early years, but it is still a multiple of the risk of either gold or the S&P 500.
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