Bitcoin extends its breathtaking rally by soaring above $50,000 on Tuesday. The cryptocurrency’s fivefold advance towers above the returns for more traditional investments such as gold, stocks, and commodities. Some see the rally as a sign that the biggest of all cryptocurrencies is gaining acceptance within the investment community as well as companies.
The rapid rise of Bitcoin has been buoyed by its ever-widening acceptance, notably the disclosure on Monday by Tesla that it has bought $1.5 billion worth. In a statement, the company said the purchase would provide flexibility to diversify and maximize returns on their cash. The company also stated that it would start accepting Bitcoin as payment for its cars.
Tesla’s announcement, along with a flurry of others, has catapulted Bitcoin and other cryptos onto the agenda of corporate treasures. According to sources, Morgan Stanley is currently weighing whether it should become involved or not. In Canada, the first North American Bitcoin exchange-traded fund has been approved by regulators.
Some investors suggest that such moves may help bitcoin become a widely accepted form of payment, which, in turn, may further bolster prices. Russ Mold, investment director of AJ Bell, suggests that the more the crypto is used, the greater its chance of becoming a mainstream currency, which in turn, would feed further speculative interest.
Investors Looking for High-Yield Assets
The rush by investors to buy Bitcoin comes after its 300 percent increase in value last year. Bitcoin is attractive for investors seeking a high-yield asset as well as an alternative to the dollar amid low or even negative interest rates.
Five years ago, Bitcoin traded in the low hundreds of dollars. The meteoric rise of the bitcoin has led major investment banks to warn of a bubble caused by speculation. A spokesman for Bank of America said, “Bitcoins rise blows the doors of prior bubbles.”
Although Bitcoin is entering the mainstream, it and other cryptocurrencies are subjected to little oversight. With crypto being associated with crime and with a lack of regulatory clarity, many large investors are leery of exposure.
U.S. Treasury Secretary Yellen, along with Christine Legarde, President of the European Central Bank, are both calling for a tightening of oversight of Bitcoin over concerns that it may become a tool to be used for criminal activities, such as money laundering. Many believe that the extreme volatility of Bitcoin is ample reason for concern.
George Lagarias, Chief Economist at Mazars, feels that with its historical volatility, Bitcoin does not have qualities that are inherent in “money,” such as being a stable store of value as well as a unit of account.
Is Bitcoin Becoming “Digital” Gold?
Analysts have suggested that another factor in Bitcoin’s phenomenal rise is its limited supply. With only 21 million Bitcoins available, this could give rise to further gains.
The President of the St. Louis Federal Reserve, James Bullard, stated on Tuesday that the claim by Bitcoin to be a rival to gold would not pose a threat to the dominance of the U.S. dollar. He went on to say that investors want a stable store value, they want a safe haven, and they want to make investments in that currency. He believes it is difficult at best for a private currency to play that role.
In January, JPMorgan said that if Bitcoin rivaled gold, it could very well trade close to $150,000 if it becomes established as a “safe-haven” asset.
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