(AP Photo/Mark Lennihan, File)
Bitcoin has been flying high lately, making many investors overnight millionaires—investors who poured money into the digital currency when it was trading at a tiny fraction of its current price. And it will make more millionaires, as it could reach for new highs before coming back down to earth.
Fund 12-month performance
SPDR Gold Shares (GLD ) 12%
Bitcoin Investment Trust Shares (GBTC ) 800%
Source: Finance.yahoo.com 6/6/2017
There are a few good reasons for Bitcoin to do so. First of all there’s the ultra-low interest rate environment, which makes the Bitcoin “carry trade,” an appealing proposition. Then, there’s a growing mistrust of national currencies, following a number of government policies that have pushed more investors to Bitcoin.
One of these policies is the pouring of new debt onto old debt by issuing new treasury bonds at record low rates. Japan, for instance, sells treasuries that yield next to nothing, though its debt amounts to as much as 250 percent of GDP. China’s treasuries yield something, but no one knows what its unofficial debt is.Wouldn’t you rather hold Bitcoins rather than yen or yuan denominated debt? Apparently some investors think so.Another policy is the efforts of governments in emerging markets to get rid of old currency notes, as was the case with India and Venezuela a few months ago – a move which coincided with the beginning of the recent Bitcoin rally.There are advantages that makes Bitcoin a better hedge against global uncertainties than conventional hedges like gold. At least for the millennial generation, which understands the digital currency better than the baby-boomer generation.Unlike gold, for instance, Bitcoin is a convenient medium of payment around the globe.Then, there’s scarcity. Bitcoin supply is expected to be limited to 21 million. By contrast the supply of gold, on the other hand, tends to increase anytime its price rises, as that provides an incentive for gold miners to mine for gold.Meanwhile, there’s investor hype. More and more investors are becoming familiar with the digital currency, and can use ETFs to conveniently participate in the market.Of course we all know what happens to an investment when investor hype cools, or even worse, turns in the wrong direction. It dives back to earth; and millions vanish… much faster than they accumulated.