There are two unique things about this rally in bitcoin. The first is that it’s happening without much retail excitement. The second is that it’s happening almost entirely on its own – unaccompanied by stocks, gold, or other cryptocurrencies.
The latter is particularly interesting because the state of financial markets today is a fairly precarious one. COVID cases are surging, we’re in the middle of an awkward Presidential transition, and most economists agree we’re overdue on economic support from the government. Amid all this, investors are turning to… crypto! And it’s not just the Bubble Bros and hype-masters from way back when; it’s Wall Street legends like Paul Tudor Jones and Bill Miller, among other mega-rich types, who’ve gotten more vocal about using bitcoin as a digital alternative to gold in an environment where they perceive inflation and dollar-devaluation to be a risk worth hedging.
If we accept this use-case of bitcoin, it’s not hard to see why it’s gaining traction again. Global negative-yielding debt is back at a record, and it looks like we’ll get another dose of fiscal stimulus on top of a couple doses of vaccine. Inflation and devaluation may not be happening now, but bitcoin moves with a higher beta to its underlying potential than any other asset in history. As the market rotates toward recovery plays, the possibility that reflation could turn to inflation is very much on the table. Even a small increase in the probability that bitcoin’s use-case as a hyper-inflation hedge will come true generates a huge response in price, because it’s basically an all-or-nothing bet on the financial system changing forever.
In other words, yes — the case for bitcoin is more compelling, and has been since it started breaking away from the Nasdaq in October. But it’s still very risky, very volatile, and that’s exactly why Wall Street needs it. Risk implies reward, and investors are getting hungry for reward. Data shows they’ve piled back into equities at a record pace, but the Nasdaq hasn’t made a new high since September and the S&P is up just 2.5% since learning Pfizer and Moderna would literally save the world. Gold isn’t working and bonds have been selling off for three months. Moreover, Treasury yields are climbing without any meaningful pickup in inflation, shock in economic data, or change to Fed policy. One conclusion is that fits with bitcoin’s rally is that investors are weighing the impact of Treasury supply via stimulus.
If you’re a money-manager out of ideas in a market where everything is on hold and the most reliable bull markets in tech and bonds are down over the past quarter, why not take a shot at the lotto if the odds of winning just went up? The buyers behind this rally play higher stakes and that could mean a bigger pot, but make no mistake: the game hasn’t changed. Just because it’s billionaires building a bubble doesn’t mean it isn’t one.