Bitcoin stakes claim as pandemic refuge for the brave

Bitcoin's investor base is also widening as more institutions make the jump into the asset class.
Bitcoin's investor base is also widening as more institutions make the jump into the asset class.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Bitcoin is seizing the spotlight from gold as a hedge against risks such as further dollar weakness or a pick-up in inflation, after widening its performance lead over the yellow metal.

The cryptocurrency's approximately 150 per cent jump in 2020 puts the digital coin's price relative to gold at the highest in almost three years, data compiled by Bloomberg show. The climb comes as investors search for portfolio buffers amid predictions the dollar could drop as much as 20 per cent next year in the economic recovery from the pandemic.

"Bitcoin seems to be the hedge of choice against the US dollar debasement that is looming, either through more Federal Reserve quantitative easing, higher government debt or a steepening yield curve - or all three," Jeffrey Halley, a senior market analyst with Oanda Asia Pacific, wrote in an email.

Bitcoin's investor base is also widening as more institutions make the jump into the asset class. Purchases or endorsements from the likes of Square Inc., Paul Tudor Jones and Stan Druckenmiller add to the mix. But its volatility - including a furious run toward US$20,000 (S$26,870) in December 2017 followed by a bust - make arguments for the cryptocurrency as a store of value contentious.

Fear of missing out "is well and truly in play here, and the fact that so many big hitters are publicly declaring their positions is clearly helping," Chris Weston, head of research at Pepperstone Financial, wrote in a Nov 18 note. "I don't see this move as a mania or grossly over-loved just yet."

Gold has dropped about 10 per cent since its record in August, paring an advance this year to around 23 per cent. Some strategists are turning bearish. Morgan Stanley, for instance, cut its forecast for the precious metal to US$1,825 an ounce on average for 2021 from a previous US$1,950, arguing that the global economic recovery is undercutting the case for further gains.

A rise in 10-year US Treasury yields above 1 per cent in coming months may cap gains in the metal, but it will remain attractive as a haven next year, Mr Halley said.

As Bitcoin more than doubled this year, so has the Bloomberg Galaxy Crypto Index, tracking Bitcoin and the biggest rival coins. Coinciding with these rallies are growing investments by non-crypto firms in infrastructure and services, such as PayPal's decision to allow its customers to spend crypto in its network of 26 million merchants.

"Gold still has a stronger track record and has proven itself over decades as a safe-haven asset during downward trending markets," Shaun Djie, chief operating officer of Digix, wrote in an email. Bitcoin hoarding by some investors helps to explain its recent outperformance and poses a risk if these "whales" start to sell, he said.

Bitcoin traded at about US$18,000 on Thursday, after reaching that level a day earlier for the first time since 2017. Gold was steady at US$1,867 an ounce. The Bloomberg Dollar Spot Index held near its lowest since April 2018.