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What will happen to bitcoin prices in 2021?

by LLB Editor
19th May 21 11:10 am

Bitcoin prices have fallen below $40,000 as Tesla and China developments highlight the difficulties cryptos face

Laith Khalaf, Financial Analyst, AJ Bell said the price of Bitcoin has tumbled by a third over the last month, which highlights the extreme risk inherent in cryptocurrency.

Risk cuts both ways however, and Bitcoin is still trading above where it started the year, so many investors will remain in profit, albeit trimmed back by the recent fall. Some rough and tumble is to be expected when holding something as volatile as cryptocurrency, but in recent weeks there have been significant developments which undermine Bitcoin’s long term prospects.

“The tide has turned on Bitcoin because environmental concerns and regulatory risks have materialised, which have raised doubt over the long term adoption of cryptocurrency by businesses and consumers. Tesla’s decision to suspend accepting Bitcoin on environmental grounds will give other companies the jitters about facilitating crypto payments, lest they spark an ESG backlash from shareholders. Those companies which already accept Bitcoin will likely be having second thoughts.

“Consumers and investors may also start to shun cryptocurrency, when they discover it’s an environmental deadweight, particularly younger Bitcoin fans who are also likely to be sensitive to climate issues. Bitcoin mining uses up a phenomenal amount of energy, and unlike traditional metal mining, doesn’t actually produce anything which is useful in the economy. Even celebrity endorsements may dry up as public figures become wary of being associated with an environmentally unfriendly product.

“Meanwhile the Chinese central bank has issued a warning that cryptocurrencies shouldn’t be accepted as payment for products or services. This is a manifestation of the regulatory risk surrounding cryptocurrencies. Central banks aren’t simply going to roll over and let systemic risks build up on the back of Bitcoin trading, particularly when cryptocurrencies are looking to usurp their position as arbiters of monetary value.

“It’s worthy of note that the fund manager, Ruffer, has now sold out of Bitcoin, having harvested a tidy profit in a few short months. Ruffer isn’t a whizzy hedge fund, which you might expect to dabble in crypto, rather it’s a conservative investment manager which looks to make steady returns over the long term from a diversified mix of assets. That such a successful fund manager, with a reputation for capital preservation, saw fit to invest in Bitcoin does lend some weight to the long term case for cryptocurrency. Importantly though, Ruffer only invested a small amount of its portfolios in Bitcoin to provide diversification from other mainstream assets. It also acted as a hedge to some of its exposure to gold, which may come under pressure from Bitcoin, as the two assets share many characteristics.

“Indeed, the same environmental concerns that are now being thrown at Bitcoin, could also be levelled at gold. Gold mining consumes a significant amount of energy and yet the precious metal has few uses in the real world. As Warren Buffet has pointed out, people go to extraordinary lengths to dig gold up out of ground, only to transport it and bury it somewhere else, usually a bank vault. Gold does have a much longer trading history, and is a well-established way to gain portfolio diversification, which has opened up to retail investors in recent years thanks to the arrival of ETFs offering low cost, convenient exposure to the precious metal. Bitcoin, by contrast, is very much the new kid on the block and may never attain the same status as gold. As a sign of contrasting perspectives on the two assets, the FCA recently banned the sale of ETFs tracking cryptocurrency to retail investors, whereas gold ETFs continue to be freely traded.

“Both Bitcoin and gold are economically inert, and actually therein lies their appeal for investors. The fact these assets don’t move in step with economic trends like stocks and bonds, means that they can actually provide a useful piece of balance in a mixed portfolio. However, some consumers have been buying Bitcoin naked, without the cover of a diversified portfolio that investment modesty dictates. A survey conducted on behalf of AJ Bell earlier this year found that six out of ten of cryptocurrency holders don’t have an ISA, and only half have a pension*. That leaves these investors entirely exposed to the fluctuations of Bitcoin, and may result in a significant loss of capital which isn’t offset by gains elsewhere.

“As inflationary fears surface, investors might legitimately be asking whether cryptocurrency could provide them with some protection from rising prices. But the trading history of Bitcoin is too short and volatile to provide any evidence of a link with inflation. The price of cryptocurrency right now is also likely to be driven by factors other than economic fundamentals, namely regulatory developments, business adoption, and Elon Musk’s Twitter feed. So Bitcoin doesn’t provide the inflationary hedge investors might be seeking. Bitcoin can be used as a bit of portfolio diversification if you already have the main bases covered. But the most you should invest is a tiny amount of your overall wealth, and buckle up for a bumpy ride.”

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