Investors in bitcoin apparently unheeded warnings by analysts that the crypto currency is an “economic side show” and is a poor hedge for the drop in stock prices as the market capitalization of the virtual currency hit a value of $1 trillion with yet another rise to a record high on Friday.
An all-time high of $56,399.99 was hit by the world’s most popular crypto currency with a weekly jump of 15 per cent and an almost 70 per cent surge so far this month.
The surge in large companies and main stream investors, including firms such as Tesla Inc and Mastercard Inc and investing firms like BNY Mellon, willing to accept bitcoin as a means of transactions has fuelled the gains in the crypto currency.
The total market cap of all the digital coins combined is about $1.7 trillion.
“If you really believe there’s a store of value in bitcoin, then there’s still a lot of upside,” said John Wu, president of AVA Labs, an open-source platform for creating financial applications using blockchain technology.
“If you look at gold, it has a market cap of $9 or $10 trillion. Even if bitcoin gets to half of gold’s market cap, that’s still growth of 4X, or $200,000. So I don’t know when it stops rising,” he added.
According to Jacob Skaaning, portfolio manager at crypto hedge fund ARK36, the next target for bitcoin is to surpass the market value of Alphabet Inc which is currently at $1.431 trillion.
“There will likely be some big fluctuations along the way, but I’m still very bullish and I believe the uptrend will continue for the time being,” he added.
But the only partially regulated and highly volatile digital asset and still used very little in commerce have still evoked sceptical reactions from many analysts and investors.
The prices of bitcoin in recent times have all been above the estimates of its fair value, said analysts at JP Morgan. The investment bank said in a memo that bitcoin’s correlation with cyclical assets – which increase and drop with changes in economies, increased by the mainstream adoption of bitcoin which in turn reduces the benefits of diversifying into crypto.
“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” JP Morgan said.
It added that bitcoin is an “economic side show” while identifying the innovations being brought into the area of financial technology and the transformation of digital platforms into credit and payments as “the real financial transformational story of the Covid-19 era.”
One of the major hurdles for bitcoin in becoming a widespread means of payment is its volatility, said other investors this week.
Owning the virtual currency was only a little better than holding cash, said Tesla boss Elon Musk on Thursday. Musk’s recent tweets have fuelled a rally in bitcoin recently. Further, the decision of Tesla to purchase of $1.5 billion of bitcoin recently, which generated renewed interest in the crypto currency, was also defended by Tesla.
(Adapted from GDOnline.com)