Tales from the Crypt-o

The Bitcoin hype is back! The cryptocurrency passed the $50,000 mark for the first time in its history on February 16, 2021, and three days later, Bitcoin surpassed a market value of $1 trillion. This is a significant milestone for the volatile cryptocurrency, which has had a wild ride over the past several years. Some asset managers say bitcoin is the future currency and has price targets at $1 million. Others say it's currently the biggest bubble in financial markets. Only time will tell how this plays out.

If you remember, Bitcoin saw a surge in price that pushed it close to $20,000 in December 2017. This increase was driven primarily by retail investors hoping to invest early in the "currency of the future." Investors liked it because it was unregulated and separate from the global financial systems. However, it fell roughly 80% over the following year to close out 2018 under $3,900. So why the resurgence over the past year?

There are several factors, but it seems the initial catalyst was fear of inflation due to massive global fiscal and monetary stimulus in reaction to the COVID-19 pandemic. Investors were afraid that central banks printing money for stimulus reasons would drive up inflation, so investors turned to Bitcoin as a store of value. Bitcoin has a finite and fixed supply. It was written into its code that only 21 million coins would ever exist. About 18.5 million are currently in circulation, and many millions of those are thought to be permanently lost, further increasing their rarity.

This current surge in price is different because of institutional investors' support, which shows additional confidence in the future of Bitcoin and cryptocurrencies. Square (SQ) announced in October 2020 that it bought approximately $50 million Bitcoin. Insurance giant MassMutual purchased $100 million Bitcoin at the end of 2020. Tesla (TSLA) disclosed, in February 2021, a $1.5 billion investment in Bitcoin and said it would start allowing customers to purchase their cars with Bitcoin. Other large firms have dabbled with Bitcoin, and more seem to be warming to the idea of Bitcoin in general.

Another reason for its recent climb in price is bitcoin is becoming easier to purchase through various apps and websites. For example, PayPal now allows customers to buy, hold, and sell bitcoin directly from their PayPal accounts. There are also Exchange Traded Funds (ETFs) that track the price of Bitcoin (and other cryptocurrencies). This allows individual investors to get exposure to cryptocurrency while not having to open a separate account to hold bitcoin.

Many of the same issues with cryptocurrencies in 2017 are still relevant today—it's quite volatile, unregulated, and not backed by any government entity. The volatility alone has to give merchants pause about accepting Bitcoin. For example, if I buy $100 worth of goods in bitcoin, there is a real possibility that the $100 bitcoin is only worth $90 a couple of hours later. Many companies that accept Bitcoin for their products immediately sell and convert them back to dollars or other more traditional currencies. Many will like that it is currently unregulated by any government; however, this makes actions such as money laundering, purchasing illegal goods online, and funding terrorist organizations much easier. Due to the current difficulty in regulating Bitcoin, it is doubtful that any government would want to acknowledge any cryptocurrency as a legitimate medium of exchange.

The best piece of advice with Bitcoin is probably: don't forget the past. No one knows where the cryptocurrency is heading. You can argue that Bitcoin is another way to diversify your portfolio, but it would most likely be the riskiest allocation that you have. Keep in mind that for most of the companies investing in Bitcoin, it is a very small allocation for them. For example, Square's $50 million investment is only about 1% of its total assets. Avoiding overly concentrated positions in any asset is important, especially one as volatile as this. Whether Bitcoin is suitable for your portfolio is something that you should discuss with your investment advisor.

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