What’s driving the bitcoin mania

Skeptics have dismissed the massive runup in Bitcoin over the past two months as another example of rampant retail trader speculation that is bound to end in tears.

Driving the news: The cryptocurrency jumped from around $14,000 per coin on Nov. 3 ($10,500 as recently as Oct. 3) to more than $34,000 on Sunday, then dipped by $5,000 overnight. But this time really is different.

What’s happening: This time it’s the institutional investors who have FOMO.

• Big names like JPMorgan, Guggenheim, FundStrat’s Tom Lee, hedge fund legend Paul Tudor Jones and 169-year-old insurance giant MassMutual have recently given their seals of approval, betting hundreds of millions of dollars on Bitcoin’s upward trajectory and publicly touting price targets of $400,000 a coin.
• Further, involvement from Square, PayPal and Visa, which reportedly is “actively working with over 25 digital currency companies on a variety of bitcoin-related products and services,â€� are providing a use case for the cryptocurrency.

Flashback: The price of Bitcoin crashed not long after peaking at just under $20,000 a coin in December 2017 and remained generally muted until late 2020.

Between the lines: “Governments are strapped,” says Douglas Borthwick, chief marketing officer and head of business development at crypto trading platform INX.

• “They can’t raise money to pay for things by raising taxes so instead they have to print new money.”

The big picture: That has put more of the onus on central banks to stimulate their respective economies, which historically has driven down the value of fiat currencies.

• Bitcoin, which isn’t valued against other currencies but versus the finite supply of mined coins, is seen by many as a way to bet on the destruction of currency value globally, Borthwick notes, making it “a hedge for inflation by everyone in the world.”

The intrigue: With investors believing the Fed and other major central banks will backstop or underpin markets with trillions in liquidity should bond yields rise or stock prices fall, institutions are emboldened to make bets on a risky asset like Bitcoin with little fear.

• In the case of another market downturn, Fed money printing would not only clear the bond market and pump firms’ stock prices, but would further juice the value of an asset with limited supply like Bitcoin.

Yes, but: That confidence from institutional investors should not be seen as a belief that a significant correction and substantial volatility are not forthcoming. The volatility is largely expected and most institutions are incorporating Bitcoin and crypto allocation at around 1% or less of assets under management.

• Should a major correction happen, institutions expect to be protected from much of the fallout. Individual investors will not be so fortunate.

Bitcoin gained more than 300% in 2020, including a nearly 50% jump since crossing a then-record high of $20,000 a little more than two weeks ago.

• And just four days into the new year it’s already had a massive fall.

Driving the news: A “fast-paced market that has very little liquidity over the holiday break” helped drive the Bitcoin surge, Borthwick says, but a major factor also has been the fact that the big institutions moving in are buying in large quantities and no one is selling.

• With firms betting Bitcoin’s value can still increase by 10 times from its current level and early-stage investors in no rush to sell, everyone is on one side of the trade.

Watch this space: The value of Bitcoin is driving companies like MicroStrategy, which recently sold debt in order to purchase more of the cryptocurrency, to start adding Bitcoin to their currency reserves.

Don’t sleep: JPMorgan analysts in a recent note said that if pension funds and insurance companies in the U.S., eurozone, U.K. and Japan allocate 1% of assets to Bitcoin, that would result in an additional $600 billion of demand.