Bitcoin frenzy: is this the real reason money managers are buying?

Is now the time to be buying Bitcoin? More investors seem to be coming ‘round to that conclusion, but as Scotia Wealth’s Greg Newman says, the risk is still great with a fundamentally untethered asset like this one.

Bitcoin crested above the $23,000 mark last week for the first time in its history, a significant mark according to its backers who say the cryptocurrency is fast becoming a legitimate store of value.

And if the parade of institutional investors jumping onto the bandwagon wasn’t enough, Tesla founder Elon Musk has been stirring the pot with a series of tweets suggesting he may be buying into Bitcoin.

The news comes after established and institutional investors have been marked as leading this year’s surge in Bitcoin, in contrast with the 2017 Bitcoin bubble which was driven more by retail investors joining the cryptocurrency frenzy. To take a few examples, earlier this year, Morgan Stanley came out in favour of Bitcoin as an alternative to stocks while more recently CNBC reported that Paul Tudor Jones and Stanley Druckenmiller have supported owning Bitcoin. As for predictions of where the currency is headed, last month a Citibank analyst surmised that Bitcoin could hit $300,000 within a year’s time.

“I think the difference with Bitcoin having the run now as opposed to a few years ago is that managers in the establishment are starting to buy it. A few years ago, they were fearing if did own this name then they might get fired and I think now they’re looking at it saying if I don’t own this name I might get fired…”

Those institutional positions are significant for the future of cryptocurrencies, said Newman, a senior wealth advisor at Scotia Wealth.

“I think the difference with Bitcoin having the run now as opposed to a few years ago is that managers in the establishment are starting to buy it. A few years ago, they were fearing if did own this name then they might get fired and I think now they’re looking at it saying if I don’t own this name I might get fired,” said Newman, speaking on BNN Bloomberg on Friday.

“So, there’s this frenzy to own it and if it really proliferates into the imagination and into the traditional money managers, then it’s got a long way to go, whether it ends up being real or not,” Newman said.

Newman claims there’s an inherent risk to owning Bitcoin that separates it from other asset classes and that’s keeping him from advising investors to put anything more than a sliver of their portfolio in the crypto.

“There are 21 million bitcoins that are ever going to be mined and about 18 million of them have been mined. Apparently, the next three million will happen over the next 100 years. So, as I understand it, there really is a legitimate issue of scarcity,” he said.

“Their currency is something that has to be believed and for bitcoin I don’t think the future is really decided. I think if people start to really believe that it’s real and it’s universally traded and accepted as a mode of exchange, then it will become real,” the fund manager added.

“[But] I do think Bitcoin is worth a shot if you are being speculative and if you’re just looking at the charts. I like to own things that have a more fundamental backing that if they turn against me I really know whether to buy more rather than just assuming, ‘Hey, some other guy is going to believe this.’ So, that’s my problem of owning Bitcoin in a big way,” Newman said. “But I do think the better view is it goes higher.”

Last week, CNBC reported that UK asset manager Ruffer, which has about $27 billion in assets, appraised its clients about a “new allocation” to Bitcoin of about 2.5 per cent of its overall portfolio, saying, “We see this as a small but potent insurance policy against the continuing devaluation of the world’s major currencies.”

“Bitcoin diversifies the company’s (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see,” Ruffer said.

Also last week, news broke that cyptocurrency brokerage Coinbase had filed a statement with the US Securities and Exchange Commission, intending on issuing an IPO and with Goldman Sachs reportedly being named as the issue’s lead banker. The news comes after months of speculation that Coinbase, which so far has reportedly traded over $320 billion in cryptocurrency volume over its eight-years in existence, could be valued at its IPO in the tens of billions of dollars. Coinbase is currently one of the largest crypto exchanges in the world with about $20 billion in assets under custody, reportedly up from just $7 billion last year.

Coinbase co-founder and CEO Brian Armstrong said in a December 16 blog post that while cryptocurrencies are “a truly game-changing innovation,” investing in them is not without risk, as they represent an often more volatile asset class than traditional instruments.

“While we offer a full range of trading tools for traders to take advantage of market conditions, we likewise caution investors who may be focusing on short-term speculation and encourage customers to seek out resources and consult financial advisors to better understand the risks associated with investing in cryptocurrencies,” said Armstrong.

“For those who believe in the potential of crypto, we also all have to believe that we’re still in the very early stages and that there’s a lot more to come,” he said.