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If you ever see me, in any forum, recommending that people should buy crypto, then one of two things has happened. Either someone has created a deep fake of me, or I have been kidnapped. In the latter scenario, “buy crypto” would be my secret distress signal. Call the cops.
Nonetheless, it is hard to ignore the startling rally in bitcoin. Trust me, I’ve tried. Somehow, despite a swirling hellfire of regulatory aggression and legal strife afflicting several of the key institutions in this space, the price of this token has risen by 160 per cent this year (not a typo) to $44,000, in a rally that has accelerated sharply over the past week or so. That comfortably eclipses any traditional asset class on the planet.
To be clear, if people want to buy these tokens, I bear them no ill. People spend money on Crocs sandals, real ale and other things I don’t like all the time. Similarly, taking a punt on a crypto token is just as valid as buying a lottery ticket or putting a fiver each way on the 1.40 at Kempton racecourse. Nothing wrong with that. If you want to do this, knock yourself out. I hope it makes you rich. If it does, the last laugh will be yours, so please don’t bother sending the usual all-caps emails telling me I’m an idiot — they’ll just go in the file with the others.
Still, what are the circumstances under which this works as an investment strategy? What does the price rise really mean? When the asset class is, say, stocks or bonds, investors have broadly agreed metrics and assumptions to answer those questions. But this is bitcoin. Strap in for a dizzying exercise of partially sensible but largely circular arguments that lots of reasonable people sincerely believe.
Zach Pandl is one of those people, who left a career in macro strategy at Goldman Sachs for a role as an analyst at Grayscale, which operates crypto investment trusts. “I believe in the future of this,” he says. But at the same time, “I’m not an ideological person here”.
Pandl generally looks at the value of crypto tokens through the same lens as major currencies, which are broadly (and I stress broadly) determined by real interest rates and fund flows. Pandl reckons bitcoin’s latest violent ascent is really down to the US Federal Reserve and the assumption it is done raising rates and may even cut them soonish. “Gold has noticed that, bonds have noticed that, and bitcoin has noticed that,” he says. So far so plausible: the very large drop we have seen in bond yields recently boosts the relative allure of non-yielding assets like gold and crypto. But for Pandl, this is about more than just that.
Instead, he says bitcoin is the only “obvious competitor currency” in the event that the US dollar is “debased”. The euro, sterling, yen and renminbi do not, for him, pass the test. This requires you believe two things: that dollar debasement is really a thing, and that it can be replaced in its central role as the world’s reserve currency by a token you cannot yet use to buy a cup of coffee. It’s a stretch.
Apart from interest rates, another key short-term trigger often cited for bitcoin’s latest rally is that the manifold well-publicised failures of crypto projects over the past year, and in particular last month’s $4.3bn fine on Binance, could have been worse. My thought here is “apart from that, Mrs Lincoln, how was the play?” But for those crypto proponents who are not in jail, the fact Binance still exists at all is a positive.
The big one though is investor demand. I am yet to meet a single chief investment officer or portfolio manager at any institutional money manager who has any interest in bitcoin. Boosters insist bitcoin is bringing in this kind of money, but beyond a few hedge funds, venture capital firms and family offices, the evidence for this is scant at best. Wealthy individuals are probably aware of bitcoin’s latest leap, but even there, sector advisers are sceptical. “I’m not seeing more demand from the client side,” said Christian Nolting, chief investment officer at Deutsche Bank Wealth Management. “I have enough volatility on the bonds side, I don’t need crypto for the vol,” he said.
It is possible that if US regulators approve the launch of cash bitcoin exchange traded funds by institutions such as BlackRock, that might tempt more investors to seek exposure to crypto through them. This could, potentially, really be a breakthrough moment but the true demand is yet to be seen and it could already be priced in.
This is just one of the contradictory arguments here, though. At the same time, we are told crypto is up because sovereign citizens want to avoid government and regulatory intrusion, and it is up because it may be about to gain greater regulatory oversight. It is apparently simultaneously a bet on inflation falling, and a hedge against inflation rising. It is a currency, but also a speculative asset.
These things can’t all be true at the same time. The fact is, different people buy crypto for all of these different reasons and more, contradictions be damned. The only thing the latest price rise tells you is that an unknown number of people are buying this illiquid token more enthusiastically than they were before. Number go up.
katie.martin@ft.com
