Anyone who jumped on the bitcoin bandwagon at the start of 2020 will likely be rubbing their hands with glee.
Someone who bought £1,000 worth of the cryptocurrency would have seen that turn into £3,292.16 by the last weekend before Christmas, a return of 229 per cent in less than a year, according to personal finance comparison website Finder.
During the same period, if the sum was invested in real, physical gold it would have turned into £1,214, and £865.66 if it had followed the FTSE 100.
Someone who invested £1,000 in bitcoin at the start of the year would have seen a 229% return
It might be incredibly volatile, it might have no real underlying value and it might still be hard to do anything with, but there’s no doubt that bitcoin has had a stellar year.
After a quiet two years since the bubble last burst in 2018, the cryptocurrency has been on a surge in the second half of 2020, having initially seen the price fall to as low as $3,800 a coin in mid-March when investors were dumping assets of all kinds in a mass sell-off in response to the coronavirus.
By late December, it had reached a new all-time high of around $23,500, a more than 500 per cent rise from trough to its new peak.
And equally as eye-catching as the raw numbers has been mainstream finances’ changing view of the cryptocurrency, which has helped push bitcoin to new heights.
Unlike three years ago, when it peaked at just under $20,000 a coin before collapsing, this year’s surge has not been driven by hype-fuelled everyday investors buying up the 21st century equivalent of Dutch tulips.
Instead, ‘it finally got the seal of approval as an investment from many of the biggest investors in the world and the biggest Wall Street banks’, Glen Goodman, an analyst and author of The Crypto Trader, said.
Bitcoin has risen from a low of $3,800 a coin to a new all-time high of more than $23,500 this year, with the price tripling since January
Having until fairly recently turned their noses up at the cryptocurrency, seeing it something akin to a gambling chip, asset managers and banks are now diversifying their holdings, in some cases selling out of gold and buying into bitcoin.
This has largely been due to three connected ‘c’s’, coronavirus, central banks and currencies. ‘Bitcoin’s price has tripled since the start of the year and I have to wonder whether any of that would have happened in the absence of coronavirus’, Goodman said.
‘Before then, the global economy was doing fine, but the virus lockdowns put central banks in panic mode. The US Federal Reserve started printing new money in unprecedented quantities, in the hope of giving their economy a jump-start.
Analysts at major banks like JP Morgan have changed their outlook on bitcoin, and have even argued it could prove an alternative to gold
‘Diluting the dollar put downward pressure on its value, and as the dollar sank, gold and bitcoin rose. A narrative of bitcoin as a better store of value than the dollar became popular with some of the biggest names in finance.’
Tom Stelzer, a crypto specialist at Finder, added: ‘bitcoin has proven to be a valuable hedge, beating out traditional store-of-value assets like gold.’
Certainly, the idea of bitcoin as ‘digital gold’ certainly appears to have caught on. Grayscale, an asset manager focused on digital currencies, saw a record $1billion
poured into it between July and September, 81 per cent of which came from institutional, rather than everyday, investors.
Bitcoin has been here before in 2017, but will this be a new dawn or another bubble about to burst?
Of that $719million was invested into its bitcoin trust, which now has around $10.2billion worth of assets under management and has returned 271 per cent over the last 12 months.
Incredibly, the $2.4billion it has seen invested in the last 12 months across all its funds, which also invest in other cryptocurrencies like ethereum was more than double what it had received in the previous six years.
‘After vastly outperforming traditional markets in 2020, bitcoin has now arguably cemented its place as a worthwhile investment thanks to a number of high-profile funds like Grayscale and MicroStrategy investing billions in the cryptocurrency’, Stelzer added.
In a major coup for bitcoin, PayPal said customers would be able to use its app to make purchases using the cryptocurrency next year
As well as the perception it is now an effective hedge against inflation, the view of bitcoin as an actual currency which could be used to make payments has also been endorsed, thanks to high-profile backing from established payment providers like PayPal and Square.
Goodman previously told This is Money the news that PayPal would let customers buy, hold and sell bitcoin within its app and use it to make payments from next was ‘a really significant vindication from mainstream finance’.
He added the move by PayPal ‘will lead more companies to accept bitcoin as payment.’
And even if they haven’t driven its rise this time, casual investors have also climbed into the cryptocurrency to help push it over the top.
What about the FCA’s bitcoin ban?
From January, UK cryptocurrency investors may find it slightly more difficult to buy into bitcoin.
That’s because financial regulators are banning the sale of cryptocurrency derivatives and other instruments which mimic the performance of cryptocurrencies like bitcoin to retail investors, amid fears they could see investors suffer huge losses.
What this means is that investors will no longer be able to buy into things which track the price of bitcoin, like certain investment funds, and will have to buy into the coins themselves.
Importantly, this means the likes of eToro and Revolut, as well as cryptocurrency exchanges like Coinbase, will still be open to UK everyday investors.
Simon Peters, of eToro, thinks this will have only a minimal impact on UK cryptocurrency traders. He said: ‘Interest is clearly skewed towards holding real crypto, evidenced by the fact that 85 per cent of all crypto positions on eToro in the UK are invested in the underlying asset.’
Both eToro and Revolut, which allow everyday British investors to buy and sell bitcoin, told This is Money they had seen big increases in applications and the number of customers holding bitcoin around the time it hit a new all-time high in December.
But after a stellar run in 2020, what happens next? The short answer is it’s difficult to predict, as we’re in unprecedented territory.
eToro cryptocurrency analyst Simon Peters acknowledged that ‘as we are now at an all-time high, bitcoin is in price discovery mode, which means that we are heading into unknown territory.’
However, he predicted $20,000 a coin would be the new bottom and 2021 would see even further price growth, even if it may be a ‘bumpy ride’.
That is something investors who saw their holdings lose 12.5 per cent of their value overnight in a flash crash a few weeks ago are no doubt already familiar with.
He added: ‘In 2021, a key theme will be the increased crypto investment from pension funds, hedge funds and listed companies. Companies such as MicroStrategy and Square have been adding bitcoin to their balance sheets.
‘If inflation begins to creep up or we continue to see significant monetary stimulus from central banks, then we would expect this trend to accelerate.’
However, not everyone is convinced. Bitcoin still has no real underlying basis for determining how much it is actually worth, its value comes from its finite nature but also from sheer belief in it.
And it is still not the easiest thing to find a day-to-day use for, even if British bitcoin holders will be able to ‘withdraw’ their holdings as cash at 16,000 ATMs under a recent deal struck between East London-based BitcoinPoint and CashZone.
‘The ongoing issues around the cost and speed of bitcoin transactions means it’s still not a great payment option’, Stelzer added, ‘there’s still question marks around what exactly its role will be in future.’
And, of course, some believe that the cryptocurrency’s future can be seen in its past, when it boomed in 2017 and subsequently went bust shortly afterwards.
‘The huge momentum in bitcoin is eerily reminiscent of what we witnessed almost exactly three years ago’, Paul Summers, from the investing website The Motley Fool, recently wrote for Yahoo Finance.
‘Bitcoin bulls would point to the fact that it’s ‘different’ this time. The 2020 rise, coupled with PayPal’s decision to allow those account holders to purchase cryptocurrency, is proof Bitcoin is now mainstream.
‘What’s more, the cryptocurrency could replace gold as the best store of value in troubled times. But will it really?
‘Personally, I can see history repeating itself.’
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