Bitcoin is set to finish the year with a bang, having surged more than 300 per cent in 2020.
The world’s most popular cryptocurrency added 3 per cent yesterday to $28,599 (£21,014), having broken through the $20,000 mark for the first time in mid-December.
It is a rapid turnaround for bitcoin, which has been branded a fad, is distrusted by its critics and is viewed with scepticism across the financial establishment.
Digital gold: Bitcoin added 3 per cent yesterday to $28,599 (£21,014), having broken through the $20,000 mark for the first time in mid-December
But the cryptocurrency has defied detractors and has outperformed mainstream assets in 2020, including leading global stock indices, the dollar, gold, oil and copper.
The major reasons for its rise are hotly debated but it has become increasingly popular with investors looking for homes for their wealth during the pandemic.
It has also seen increasing demand from large US funds who are particularly fearful about the rampant central bank money printing that has taken place since the coronavirus took hold.
There are now real concerns that inflation could shoot higher, forcing central banks to hike interest rates in 2021 as national debt has risen to over 100 per cent of GDP in both the US and the UK.
Bank of England chief economist Andy Haldane last week said that the vast amounts of Government spending and quantitative easing in the economy have made him ‘super-vigilant’ about a ‘nasty inflation surprise’.
Bitcoin is seen as a hedge against inflation as its supply is capped at 21m. Fans argue that this relative scarcity will help it hold its value.
Some think that if inflation rises, then bitcoin could surpass $100,000 (£73,481) in 2021.
Bitcoin has defied detractors and has outperformed mainstream assets in 2020, including leading global stock indices, the dollar, gold, oil and copper
One leading financial analyst at Citi even predicts it could hit $318,000 (£233,633) by Christmas next year. Konstantin Anissimov, director at cryptocurrency exchange Cex.io, said: ‘Safe assets on the market, such as government bonds and savings accounts, are in a worldwide crisis, providing limited returns and are being eaten away by inflation.
‘As a result, institutional investors are looking for alternative investments to meet their shareholders’ expectations. Bitcoin, similar to gold, functions as a safe haven asset with significantly greater growth potential.’
Bitcoin was invented in 2008 and for the best part of decade was seen as a vehicle for criminal activity as transactions take place anonymously over the web.
But in recent years it has become more accepted with Starbucks and Whole Foods in the UK accepting the coins via an app called Bakkt.
Established firms which have invested include US fund giant Fidelity, while Japanese bank Nomura, Goldman Sachs, Alliance Bernstein and Northern Trust are also looking at offering their corporate clients direct access to the asset class.
Christopher Tyrer, head of Fidelity Digital Assets, said: ‘It’s been a big year for digital assets and Fidelity has seen a commensurate uptick in demand as we continue to see rapid adoption of bitcoin as a payment and store-of-value technology.’
He added that fears over the debasement of conventional currencies following central banks’ responses to the pandemic ‘has prompted even greater demand’ from big investors.
He added that they have been ‘increasing [their] exposure over the past several years and are attracted to its limited supply’.
Nevertheless, would-be bitcoin buyers should stay on their toes. Some have labelled the sharp rise ‘mad’ and warned against the hysteria, adding that it could be heading for a crash.
Bank of England Governor Andrew Bailey recently said he was ‘very nervous’ about people using bitcoin to make payments.
He has also warned that people who invest in the cryptocurrency should be prepared to ‘lose all their money’.
In October, the Financial Conduct Authority (FCA) said crypto derivatives – financial products based on the price of bitcoin and other cryptocurrencies – would be banned from sale to retail consumers from next month.
It says cryptocurrencies have no intrinsic value.
Reports that bitcoin is being looked at by regulators in the United States could also cool its advance next year.
Janet Yellen, who will serve as Treasury secretary in Joe Biden‘s administration, has said the currency is a ‘highly speculative asset’ and ‘not a stable store of value’.
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