Market Insights & Intelligence

Has bitcoin discovered a bright new future?

After recovering from a significant downturn in financial markets at the start of 2020, the price of bitcoin has soared from $17k to $56k in the last three months. But haven’t we seen all this before? In 2017 the value of bitcoin more than quadrupled[1] before fading rapidly. Will the uncertain post-pandemic financial environment and interest from banks and corporates push the price even higher, or will future regulation have a chilling effect?

D’Arcy Rossiter, Head of Insights at The Hopper, provides a reality check to separate the facts from the hype on how the re-energised crypto will fit into our new financial landscape.

The uncertain post-pandemic economy

As governments make plans to revive their economies after COVID-19, central banks are determined to keep interest rates low even if inflation does pick up. At the same time, share prices have reached record highs globally. This has spurred institutional investors like pension funds, insurance companies and mutual funds to look for other ways to generate good returns for their clients. While gold has benefitted from this, investors have also started to look at bitcoin and the role it can play in their portfolios.

Banks and institutional investors reconsider bitcoin

That these institutional investors and banks are now looking at bitcoin is surprising given what some of them were saying about bitcoin only a few years ago. A prime example is Jamie Dimon, Chief Executive of US investment bank J.P. Morgan, who called bitcoin “a fraud” and said he’d “fire any trader that transacted bitcoin for being stupid”. Whilst Dimon is still to be convinced about bitcoin, J.P. Morgan are investing in blockchain technology and have added crypto exchanges Gemini and Coinbase as banking clients.

Ruffer, a traditional UK investment group, surprised the industry in 2020 when it invested $600 million in bitcoin. Duncan McInnes, a fund manager with Ruffer, stated that the rapid maturation of the crypto industry played a major role in his firm’s change of heart with respect to bitcoin. They discovered that the industry around bitcoin is now full of alumni from prominent investment banks, hedge funds and consultancies, with many crypto companies now professionalised and formally regulated. “It’s grown up”, MacInnes says.

In addition, America’s oldest bank, BNY Mellon, announced in mid-February that they would start holding and transferring cryptocurrencies for asset management clients, and Mastercard announced that it would support “select cryptocurrencies” on its payment network, allowing more stores to accept them as payment.

MicroStrategy and Tesla put their trust in bitcoin

We’ve seen a significant number of large, publicly traded companies make significant investments in bitcoin. Most notably Tesla announced in early February that they’d invested $1.5 billion from their corporate treasury into the currency. The announcement caused a $7k spike in bitcoin’s price, christened by the market the “Elon Candle”.

Whilst Tesla received a lot of press for their bitcoin investment, enterprise software company MicroStrategy was the first major company to take the leap into bitcoin. In August 2020, they invested an initial $250 million from their corporate treasury in bitcoin. They’ve gone on to invest more, selling corporate bonds to raise cash they’ve ploughed into further bitcoin. In early February 2021, the company hosted an event revealing their “playbook” for investing in bitcoin. Not only have MicroStrategy benefitted from the run-up in the price of bitcoin, they’ve also seen their share price increase from about $150/share in August 2020 to over $900/share in February 2021.

What about regulation?

As bitcoin becomes more generally adopted, questions are starting to be asked about when governments will start to regulate. Duncan McInnes of Ruffer believes that if governments want to stop a large number of institutions getting involved, they have to act soon or it’ll be too late.

Statements made by central bankers and regulators earlier in 2021 indicate that they are not huge fans of bitcoin. ECB president Christine Lagarde said in January that bitcoin was “a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity”. Ms Lagarde has called for “regulations” of the cryptocurrency to be agreed “at a global level”, potentially at the G7 or G20 groups of rich countries.

Within our group of companies, we pay a great deal of attention to any market developments that could change how users pay for services and products, and indeed what they pay with. It’s our ambition to always operate at the leading edge of the digital currency revolution, and we’ve already built a set of sophisticated and rapidly maturing crypto treasury management and payment solutions with that in mind. These flagship digital portfolio management and payment systems, as well as our analytics and offline cold storage products, were all designed to anticipate the growth of digital currencies. 

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