The problem with investing in bitcoin is that it instinctively feels too good to be true.
The largest cryptocurrency by volume is worth 600 per cent more today than a year ago, soaring from about $7,000 per bitcoin to $54,000 this week, along the way becoming one of the best performing financial assets of 2020. Despite including some extreme price swings, the year-long rally has so far defied fears of a repeat of bitcoin’s spectacular price crash of 2018.
Eye-popping returns are making it difficult for even hardened cryptocurrency sceptics not to consider putting money into bitcoin and many long-term doubters are crumbling. Jamie Dimon, chief of US banking giant JPMorgan, is just one prominent crypto bear who turned bullish in recent years. Recently emerged cheerleaders include Tesla chief Elon Musk and a number of billionaire hedge fund managers who are convinced that as the digital equivalent of gold, bitcoin’s exchange rate against conventional currencies has even further to soar.
So is bitcoin just a big Ponzi scheme or a genuine investment opportunity? Should retail investors give in to the temptation to pile in? FT Money has spoken to finance professionals inside and outside the cryptomarket and found that opinion remains sharply divided. The recent stellar performance has turned some bears into bulls. But hardcore naysayers warn that a bubble that has grown bigger is still a bubble.
Even ardent crypto fans are reluctant to wager their life savings on an asset associated with hair-raising levels of volatility. Even among these enthusiasts, many limit their investments to 1-2 per cent of their portfolio.
Regardless of whether cryptocurrencies turn out to be the digital equivalent of gold in the long run, today they are providing fraudsters with a rich hunting ground.
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Is it really different this time?
Since the start of January, bitcoin’s value has risen by 85 per cent and in mid-April it hit the latest in a series of record highs at $65,000. Companies that operate in the digital currency sector are attracting a flood of money. In a recent (conventional) stock market flotation, investors valued Coinbase, the cryptocurrency exchange launched less than 10 years ago, at $72bn, putting it equal with BNP Paribas, a French bank with roots stretching back to 1848.
Young people are in the vanguard of investing. In the UK, millennial and Gen Z investors are more likely to buy cryptocurrencies than equities and more than half (51 per cent) of those surveyed had traded digital currencies, research from broker Charles Schwab shows.
After a year of spiralling prices, bears warn of the growing risk of a 2018-style collapse. Bitcoin bulls argue that the current rally is different from the 2018 bubble burst, when the price collapsed from above $16,000 to just $3,000. Today, they say, it is driven by demand from professional trading firms and institutional investors whose presence brings stability.
Not everyone agrees. “It’s not different this time. There are no new eras, despite what the promoters tell you,” says David Rosenberg, a Canadian economist and president of Rosenberg Research. “Asset price bubbles come, bubbles go, but none of them correct by going sideways.”