LIONEL LAURENT: Caution still needed as bitcoin tests new highs
US approval of a bitcoin ETF allows investors to double down on bets for or against the fund
A “validating moment” for bitcoin — that’s how some have described its fresh all-time high, fuelled by the successful launch of an inaugural US exchange-traded fund (ETF) for the cryptocurrency. The fund has racked up assets of more than $1bn in two days and raised hopes of more launches down the line. It has also boosted pre-existing bitcoiner narratives such as it being a hedge against inflation, despite history suggesting otherwise.
But validation is not the same thing as normalisation.
This is a market whose recent rebound comes after a rough 53% drop earlier this year, with volatility far exceeding that of gold or stocks. Bitcoin has yet to be tested by a prolonged economic downturn (or indeed higher inflation), even if the idea of a store of value decoupled from regular markets is enticing more investors. The need for more consumer protection grows as regulators open the door to more products.
There are a few forces that explain bitcoin’s latest rebound.
The first revolves around co-option. Washington DC and the financial sector both seek to co-opt digital assets to their own ends rather than stamp them out entirely. The US approval of a bitcoin ETF — even if one only based on futures — wraps the volatility of crypto in something traders can understand. It also contrasts with the hawkish tone against unregulated crypto product launches or ransomware attacks fuelled by bitcoin. And it is a far cry from China’s recent blanket ban on crypto, which sent the bitcoin mining industry on a mission to set up shop in states such as Texas.
The second, capitulation, is the opposite of what happened during the sell-off earlier this year, when investors dumped their holdings amid a broader panic that price levels had become too exuberant. Today’s hype around bitcoin demand has meant that bad news — including doubts about just what assets are backing popular stablecoin Tether — fails to register and only squeezes prices higher. Talk of hedging against inflation ignores the stock-like gains that attracted hedge funds in the first place.
The third force is competition. This speaks to FOMO — the desperation of those clambering onto the crypto ladder for a shot at keeping up with or beating their peers. A survey by the UK Financial Conduct Authority published on Wednesday found that 76% of young people investing in high-risk products felt a sense of competitiveness with friends, family and other acquaintances. A false sense of safety is contributing too — 69% wrongly believed crypto was a regulated asset.
“As a result, they were unlikely to understand the lack of investor protection and the risk to their money,” wrote the regulator, which has not approved exchange-traded crypto products. Bitcoin still looks more like a machine for You Only Live Once trades.
Now consider that options on the ETF will allow investors to double down on bets for or against the fund. “Retail-YOLO types will be able to trade calls on bitcoin for the first time in regulated financial markets,” says Bloomberg Intelligence’s Eric Balchunas. That can be an expensive lesson in burnt fingers. The narratives shared on social media, where beliefs are reinforced and reflected, contribute to the risk-taking; this is where crypto overlaps with stocks like GameStop, where at one point about 900,000 retail accounts were trading it as a crowd.
Consumer protection must be a priority for watchdogs as they race to keep up with the expansion of digital assets. The ballooning of crypto in the post-lockdown economy has raised the stakes for those trying to spread the bitcoin gospel of hold on for dear life (HODL). More Americans are devoting a higher share of their purchasing power to cryptocurrency than in nearly every other country, according to Chainalysis, which found more than $750bn in crypto was sent to North America between June 2020 and July of this year.
What the crypto crowd needs is circumspection. Rather than try to find new superlatives to describe bitcoin’s all-time high, the words of Guggenheim’s Scott Minerd, who exited his bitcoin position during a sell-off earlier this year, might be worth heeding: “Discipline tells me now I don’t fully understand this.” He’s not alone.
Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion
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