T.WELVE YEARS before, on January 3, 2009, a headline on the front page of the Times Read: “Chancellor on the verge of a second bank bailout” – a reference to the UK government’s efforts to save the country’s financial system from collapse. When Satoshi Nakamoto, the mysterious inventor of Bitcoin, created the first 50 coins, now known as the “Genesis Block”, he permanently embedded the date and this heading into the dates. The hidden text was a digital battle cry. Mr Nakamoto had decided it was time for something new: a decentralized cryptocurrency free from the control of governments and central banks.
Mr. Nakamoto has disappeared from the public eye, but his invention has grown in importance – and recently increased in value. As a financial curiosity, it first garnered widespread attention in 2013 when its price rose above $ 1,000, which was then dizzying-looking. In 2017, in a frenzy of speculation, the price rose by nearly $ 20,000, but then quickly fell. As recently as October 2020, it was worth only $ 10,600. But then it started rising again, hitting its old high on December 17th and rising to a new high of over $ 36,000 on January 6th (see chart).
Over the years, Bitcoin has spawned an entire ecosystem, including many copycat tokens like Ether; and several exchanges for trading cryptocurrencies, such as Coinbase, which were founded in 2012. Many have dismissed investing in these as a pursuit for those on the financial (or even legal) edge. Bitcoin is no stranger to scandals: In 2014, for example, Mt Gox, another exchange, collapsed after a pile of tokens were stolen.
Unlike the last time prices soared, the current surge appears to have been triggered by interest from the financial institution most of whom had long despised it. Paul Tudor Jones of Tudor Investments, who manages $ 38 billion, said one of its funds could increase its bitcoin position to a “low single-digit” percentage of its assets. Bill Miller of Miller Value Partners noted that the likelihood of the token’s value dropping to zero is “less than ever”. Stanley Druckermiller, a former protégé of George Soros, also embraced the idea of using Bitcoin as a hedge instead of gold, which is often used as a financial bet on anarchy or against inflation. On December 17, Coinbase announced the IPO. A long-predicted Bitcoin exchange-traded fund (ETF) can finally be realized in 2021.
When some portfolio managers get around to investing in Bitcoin, the value could continue to rise – or at least there could be a floor. When the crowds get through a ETF, that would also keep the demand going. But other investors, like the managers of large pension funds, should continue to steer clear. They typically invest in things that generate reliable future cash flows, like bonds or stocks, and shy away from things that don’t, like gold, other commodities – and bitcoin.
Bitcoin was designed as a currency for payments and transactions. To do this, it would have to be stable and easy to use. However, Mr. Druckermiller likes Bitcoin because it is exactly the opposite: traded thinly and thus less liquid and more volatile than gold. It is increasingly being treated as an investment by those who buy and sell it and by regulators. It may be good news for those who own Bitcoin that others are piling up, but speculators’ excitement suggests that cryptocurrencies will fall far short of the high aspirations of their founders. ■
This article appeared in the Finance & Economics section of the print edition under the heading “Cryptoconversion”