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Inflation-hedge, risk-on bet: What's behind bitcoin's 2020 rally? - Metro US

Inflation-hedge, risk-on bet: What’s behind bitcoin’s 2020 rally?

A representation of virtual currency Bitcoin

LONDON (Reuters) – Is it an inflation hedge? A currency? Or just another niche asset to take a punt on? Bitcoin is in the headlines, re-kindling a debate over its true role and the drivers behind its latest scintillating rally.

Bitcoin, with a history of vertiginous ascents and steep drops, is close to taking out its record peak of near $20,000, having climbed almost 160% this year. Its gains in November alone are more than 30%.

Here’s the story of bitcoin’s 2020 rise in four charts:

Graphic: Bitcoin’s 2020 rally – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdaxbzvo/Pasted%20image%201605788019322.png

RISK-ON TRADE

As central banks and governments unleashed the money-printing presses and spending taps to combat the damage from the COVID-19 pandemic, plentiful liquidity has lifted assets from emerging currencies and junk bonds to bitcoin and stocks.

Assets under management (AUM) at Grayscale, the world’s largest digital currency manager, have soared to a record $10.4 billion, up more than 75% from September. Its bitcoin fund is up 85%.

Smaller rival CoinShares says its AUM has climbed more than 150% this year to $1.3 billion.

More broadly, high savings rates have sent money flooding into investment funds, potentially sparking interest in bitcoin as a portfolio diversifier.

JPMorgan analyst Nikolaos Panigirtzoglou says there are signs of family offices, which manage money for wealthy people, allocating towards the cryptocurrency.

Graphic: Bitcoin vs. stocks – https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgzjdnpq/Pasted%20image%201605671719397.png

INFLATION HEDGE?

With governments and central banks in full stimulus mode, some observers reckon bitcoin is a useful safeguard against inflation – with supply capped at 21 million, its scarcity gives it an innate value.

Some who buy gold to hedge inflation risk may be turning to crypto, JPM’s Panigirtozoglou said, adding: “There is a reassessment of bitcoin about its value here as an alternative currency, as an alternative to gold.”

But bitcoin’s rise outstrips gold’s gains of 20% or so, while an inflation-linked government bonds index is up 4%.

And its rally has sped up in recent weeks even as gold has flatlined, and the resurgent pandemic makes a growth and inflation recovery a distant prospect.

Graphic: Bitcoin vs. inflation hedge assets – https://fingfx.thomsonreuters.com/gfx/mkt/jbyvremdope/Pasted%20image%201605671610472.png

LOW(ER) VOLATILITY

Part of the gains may be due to growing acceptance of bitcoin as a payments system and by a broader range of investors.

Bitcoin has jumped by half since PayPal <PYPL.O> said last month it would open its network to cryptocurrencies, meaning users could spend bitcoin at its 26 million merchants.. That fanned hopes it could catch on as a way to pay.

Traders who say there is more participation by bigger investors point to lower levels of volatility than during the 2017 bubble. Ten-day price swings against the dollar between end-June and mid-November – a period when bitcoin prices nearly doubled – were well under historical averages.

“It’s still largely retail, but it’s becoming more efficient, mature, and I see more professional participants,” said Andrea Leccese of crypto fund Bluesky Capital.

Graphic: Bitcoin: a volatile history – https://fingfx.thomsonreuters.com/gfx/mkt/oakvexeydpr/Pasted%20image%201605671582232.png

(Reporting by Tom Wilson and Ritvik Carvalho; Editing by Paul Simao)

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