Buying into the Bitcoin bonanza

Three weeks ago, you would likely never have heard of Dogecoin. The cryptocurrency launched in 2013 as a joke and remained relatively untouched by the market since. That is until Elon Musk tweeted a photo of a dog with the caption "Dogue" and the cryptocurrency's price shot up 800% in just 24 hours. 

Image: Coindesk

Cryptocurrency is rocking the market, one Reddit post at a time, and if the influence of these traders has taught us anything, it is not to underestimate them. But how long can this crypto craze last? I had the same question, which is why I reached out to analysts and fund managers for both the bull and the bear cases. I found plenty of the former, and only a few of the latter. 

With Tesla announcing the ability to buy products using Bitcoin, fund managers including ARK Invest's Catherine Wood showing their support for cryptocurrency, and institutions like JPMorgan slowly hopping on the bandwagon, crypto is establishing itself as both a mainstream asset class and international currency. 

For part 2 of this collection, I chat with eToro analyst Simon Peters, who gave his outlook for cryptocurrency, at a time when Bitcoin is poised to break through $50,000. He discusses his short- and long-term crypto outlook, the current state of play for this niche that's rapidly gone mainstream, and why he believes Bitcoin is the new "digital gold". 

What is your outlook for cryptocurrency?

I am bullish on crypto-assets like Bitcoin. Since inception, its price has continued to climb as it gains more traction as both an inflation hedge and store of value. 

Aside from the potential gains that can be made from Bitcoin, I revel in the idea of being able to simply send value to anyone, anywhere at any time, without having to go through a third party. 

If we do end up seeing another Global Financial Crisis and banks place further restrictions on customer funds, then being part of a monetary system sounds appealing.

In addition to Bitcoin, I'm also bullish on Decentralised Finance (DeFi) platforms such as Ethereum and Cardano. Recent events in the stock market have restored conversations around free markets and decentralised exchanges, which will allow investors to trade directly with another individual via a protocol and liquidity pool, without the need for a central authority or third party.

What market conditions favour crypto investments?

To some extent, the current conditions are highly favourable to cryptocurrency.

We’ve been in a low-interest-rate environment since the GFC, so there hasn’t been much of an incentive for investors to hold cash. 

The combination of poor savings rates, effects of inflation, and decrease in purchasing power means investors are being forced to look for alternative methods to make a return on their money.

Institutions are being forced to look at other asset classes. In the wake of the coronavirus pandemic, central banks globally have added so much liquidity that we’re seeing stock markets, particularly in the US, make new record highs almost weekly.

Bitcoin’s fixed supply is being increasingly seen as "digital gold." It has acted as a store of value and inflation hedge for some, protecting against a potential debasement of fiat currency. This has been exacerbated by the amount of stimulus being injected into global economies by governments around the world in a bid to stave off the catastrophic effects caused by the coronavirus pandemic.

If we do see interest rates rise again, then we could see a rotation out from stocks and alternative asset classes back into cash and fixed income, but it doesn’t look likely anytime soon.

How does someone invest in cryptocurrency? And is there an ideal time? 

When considering a potential entrance to cryptocurrency, investors would be looking foremost at their personal objectives. For instance, if an investor is only planning on investing for a short period of time (such as a month or so), then buying at the peak of the market might not be the best route for them to follow. Instead, this investor should aim to wait for a pullback in price to make their move.

But if you have a long term outlook and are planning to hold for more than 10 years, then buying now might be the best option for them. Why? Because this investor will be allowing enough time for the market to recover from any potential corrections, or pullbacks in price. But then again, investors with a long term outlook may also decide to stagger their investments over time and use dollar-cost averaging, rather than investing all their capital at one price straight away.

Before investing in crypto assets it’s important to do your due diligence. Research your prospective investments, read about the topic and research the crypto asset's whitepaper to ensure that the risk and return profile of the asset matches their own. 

"It's not all pots of digital gold at the end of the rainbow"

What about the bears?

Recently, Platinum Asset Management's Kerr Neilson warned young punters of the risks of market momentum. Highlighting the enormous success of Bitcoin and other cryptocurrencies, Neilson flagged that while price appreciation looks to be attractive, crypto cannot be tendered to pay taxes, which would be a clear signal of value for money. 

"What any of them is worth is still a wild guess but one should be extremely cautious and open-minded before disregarding these coinage-funded markets."

For a more in-depth analysis on recent market movements including the Gamestop craze, read Neilson's wire here. 

Conclusion 

The bulls are charging ahead into cryptocurrency. Every investor is desperate to get a taste of this rapidly growing phenomenon. It's now almost blindingly obvious that cryptocurrency is no longer just an alternative asset class - it is a mainstream form of currency and investing. It may be deceptive and hard to predict, but it seems like cryptocurrency is here to stay. 

For more of Catherine Wood's thoughts on Bitcoin and why ARK believes Bitcoin offers one of the most compelling risk-reward profiles among assets, you can access the ARK Big Ideas report here. 

In case you missed it, part one of this collection breaks down the complex and confusing world of cryptocurrency. You can read it here. 

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