What You Need To Know
Don’t look now, but Bitcoin is back.
After a couple of big crashes that destroyed billions in value, the digital currency has rebounded to its highest value since January 2018, crossing $18,000 this week. The cause: a flurry of developments that suggest Bitcoin has taken some big steps toward going mainstream. In October, global payments giant PayPal Holdings Inc. started permitting its customers to buy and sell Bitcoin and other cryptocurrencies from their accounts. A number of tech companies, including payments player Square Inc., have begun holding portions of their cash reserves in Bitcoin. And in August, Fidelity Investments, the asset management firm with $3.3 trillion in assets, announced the launch of its first Bitcoin mutual fund.
Still, Bitcoin and other cryptocurrencies have rallied and fallen many times before. The volatile instruments remain largely unregulated assets subject to the whims of a fickle market. While speculators may be willing to dive in, more prudent investors might need to see more proof that this 11-year-old invention is truly a viable alternative to stocks, bonds and commodities. In any event, crypto, one of the wildest white-knuckle rides in the markets, is back on the radar of investors and celebrities.
By The Numbers
- 237%Bitcoin’s return since its 12-month low in March, as of Nov. 18
- 26 millionNumber of merchants in PayPal network accepting cryptocurrencies
- $510 billionGlobal market capitalization for cryptocurrencies
Why It Matters
Coming two years after the cryptocurrency market crashed, Bitcoin’s upswing has energized its true believers and caught popular attention. Ray Dalio said he might be “missing something” on Bitcoin and “I’d love to be corrected.” And Maisie Williams of “Game of Thrones” asked on Twitter if she should go long on bitcoin, drawing replies from Elon Musk and Mike Novogratz. While there’s little evidence the ersatz currency will ever change the way we spend money on a mass-market basis, there are plenty of investors willing to speculate that Bitcoin and its ilk will make an impact on the financial world.
Every year there are more signs that crypto is becoming a viable new asset class. Hot startups such as Robinhood and Revolut make crypto a key part of their trading and banking apps. Fidelity Investments CEO Abigail Johnson and Ark Investment Management CEO Catherine Wood have introduced popular funds that let investors add crypto to their portfolios. Meanwhile, a number of central banks, including the Federal Reserve and the European Central Bank, are studying how to digitalize their own sovereign currencies, a validation of the blockchain code underpinning Bitcoin.
Even so, crypto remains a tricky and volatile prospect for traders. Mania swept the market in 2017 when Bitcoin skyrocketed to $19,000 from $789 and thousands of fly-by-night outfits peddled their own copycat tokens in “initial coin offerings.” The bust left a lot of losses.
The lawlessness of the crypto space remains a big worry. The $500 million hack of digital tokens from Japanese exchange Coincheck Inc. in 2018 and the legendary takedown of Mt Gox years earlier exposed vulnerability to cyber-heists. Then there’s Bitcoin’s usefulness to criminals. Just last month, U.S. prosecutors charged the founders of BitMEX, a crypto-derivatives exchange in Hong Kong, with failing to prevent bad actors from using the platform to launder dirty money. Beginning in January, the sale of crypto derivatives to retail investors will be prohibited in the U.K.
As crypto stages its comeback investors will be casting a more sober eye on its fortunes. The hope is that the industry is entering a more mature phase less susceptible to hype and speculation (and crime).
With stalwarts like PayPal and Fidelity now in the picture, more investors may look on crypto as a valuable complement to stocks, bonds and commodities. One thing is for sure — with pandemic-induced lockdowns forcing people to shop online the shift to cashless societies is picking up steam, and that may bode well for digital money in whatever form it takes.