NEW YORK • Bitcoin investors, which include top hedge funds and money managers, are betting the virtual currency could more than quintuple to as high as US$100,000 in a year.

It is a wager that has drawn eye-rolls from sceptics who believe the volatile cryptocurrency is a speculative asset rather than a store of value like gold.

Since January, bitcoin has gained 160 per cent, bolstered by strong institutional demand as well as scarcity, as payment companies such as Square and PayPal buy it on behalf of customers.

Bitcoin is within sight of its all-time peak of just under US$20,000 hit in December 2017. It debuted in 2011 at zero and was last trading at US$18,415.

Going from US$18,000 to US$100,000 in one year is not a stretch, said Mr Brian Estes, chief investment officer at hedge fund Off The Chain Capital.

"I have seen bitcoin go up 10 times, 20 times, 30 times in a year. So going up five times is not a big deal."

Mr Estes predicts bitcoin could hit between US$100,000 and US$288,000 by the end of next year, based on a model that utilises the stock-to-flow ratio measuring the scarcity of commodities like gold. That model, he said, has a 94 per cent correlation with the price of bitcoin.

Citi technical analyst Tom Fitzpatrick said in a note last week that bitcoin could climb as high as US$318,000 by the end of next year, citing its limited supply, ease of movement across borders and opaque ownership.

Those numbers, though, are a head-scratcher for Toronto-based Kevin Muir, an independent proprietary trader.

He said: "Any hedge fund model on bitcoin is rubbish. You can't model a mania. Is it plausible? For sure. It's a mania.

"But does anyone actually have a clue? Not a chance."

DEARTH OF SUPPLY

Bitcoin relies on so-called "mining" computers that validate blocks of transactions by competing to solve mathematical puzzles every 10 minutes. The first to solve the puzzle and clear the transaction is rewarded new bitcoins.

Its technology was designed to cut the reward for miners in half every four years, a move meant to curb inflation. In May, bitcoin went through a third "halving", which reduced the rate at which new coins are created, restricting supply.

That halving has kick-started bitcoin's renewed ascent.

Square's Cash App and PayPal, which recently launched a crypto service for its more than 300 million users, have been scooping up all new bitcoins, hedge fund Pantera Capital said in its letter to investors last Friday. That has caused a bitcoin shortage and has driven the rally in the last few weeks.

BIG FUNDS BUYING?

The so-called whale index, which counts addresses or wallets holding at least 1,000 bitcoins, is at an all-time high, said Mr Phil Bonello, research director at digital asset manager Grayscale. He said more than 2,200 addresses were linked to large bitcoin holders, up 37 per cent from 1,600 in 2018, suggesting that institutional money has stormed in.

Investors such as Mr Stanley Druckenmiller, founder of hedge fund Duquesne Capital, and Mr Rick Rieder, BlackRock's chief investment officer of global fixed income, have recently touted bitcoin.

Retail investors, though, are still mostly sidelined due to the pandemic's effect on the economy. But with the entry of Square and PayPal, Mr Lennard Neo, head of research at crypto index fund provider Stack Funds, expects a deluge of retail demand more intense than in 2017.​

He forecasts bitcoin to reach US$60,000 to US$80,000 by the end of next year.

Tempus currency trader Juan Perez was unimpressed, even shocked, with all the lofty forecasts and said a bet on bitcoin at US$100,000 next year would be a bet on the collapse of the global financial system.

"Governments around the world won't let that happen. They will not let fiat currencies collapse just like that," he said.

REUTERS

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