Inflation hedging, bet risk: what’s behind Bitcoin’s 2020 rally?

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Is it a hedge against inflation? A currency? Or just another niche asset to kickstart? Bitcoin is making headlines, reigniting a debate about its true role and the drivers behind its latest scintillating rally. Bitcoin, with a history of dizzying climbs and steep declines, is set to break its record high of nearly $ 20,000, having climbed nearly 160% this year. His earnings for the month of November alone are over 30%. As central banks and governments kicked off money printing presses and spent taps to tackle the damage caused by the COVID-19 pandemic, abundant liquidity pushed emerging currency assets and unwanted bonds into the mainstream. bitcoin and stocks.

Assets under management (AUM) at Grayscale, the world’s largest digital currency manager, hit a record $ 10.4 billion, up more than 75% from September. Its Bitcoin fund is up 85%. Smaller rival CoinShares claims its AUM has climbed more than 150% this year to $ 1.3 billion. More generally, high savings rates sent money into investment funds, potentially sparking interest in bitcoin as a portfolio diversifier.

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JPMorgan analyst Nikolaos Panigirtzoglou says there are signs of family offices, which manage money for rich people, allocating to cryptocurrency. With governments and central banks in full stimulus mode, some observers find bitcoin a useful hedge against inflation – with an supply capped at 21 million, its scarcity gives it innate value.

Some who buy gold to hedge the risk of inflation might turn to crypto, JPM’s Panigirtozoglou said, adding: “There is a revaluation of bitcoin on its value here as an alternative currency, as an alternative to gold. ” But the rise in bitcoin outstrips gold’s gains by around 20%, while an inflation-linked government bond index is up 4%. And its rally has gathered pace in recent weeks even as gold has stagnated, and the resurgence of the pandemic makes a resumption of growth and inflation a distant prospect.

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Part of the gains may be due to the growing acceptance of bitcoin as a payment system and by a wider range of investors. Bitcoin has jumped in half since PayPal announced last month that it would open its network to cryptocurrencies, meaning users could spend bitcoin at its 26 million merchants. This raised hopes that it might become a way to pay.

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Traders who say there is more participation from larger investors indicate lower levels of volatility than during the 2017 bubble. Ten-day price movements against the dollar between late June and mid-November – a period when bitcoin prices nearly doubled – were well below historical averages. “It’s still largely retail, but it’s getting more efficient, mature and I’m seeing more professional participants,” said Andrea Leccese of crypto fund Bluesky Capital.

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