Friday, November 20, 2020

The "big money" transactions behind Bitcoin's surge

 Behind Bitcoin's price rise again, this controversial cryptocurrency is attracting new institutional funds.

Statistics show that the open positions of large institutional holders in bitcoin futures contracts have reached the highest level in history.

Bitcoin broke through the $17,500 mark on November 17 (Tuesday), approaching its historical high. (Editor's note: Bitcoin rose above US$18,000 on Wednesday afternoon, the first time since December 2017 to reach this high level. As of press time, the price has fallen below US$18,000.)

As the "big money" begins to flood in, this cryptocurrency is benefiting, and regulators have tacitly (if not very formally) recognized Bitcoin as an acceptable asset class. It is up 147% this year and has shown particularly strong momentum in the past few weeks. Bitcoin's all-time high is $19,783. It reached this level in December 2017 and fell sharply in the following months.

Although Bitcoin is still used for things that once disgusted investors — such as ransomware attacks against institutions — it has also been increasingly accepted by some investors as a hedge against the US dollar. Some people expect that the Fed's decision to keep interest rates low will stimulate inflation, and they believe that Bitcoin can withstand this depreciation. The supply of Bitcoin is capped at 21 million, so supporters believe that it will not depreciate in the same way. Hedge fund investor Stanley Druckenmiller (Stanley Druckenmiller) said earlier this month that he holds a "very small amount" of bitcoin because he expects the dollar to depreciate.

"I hold many, many times more gold than I hold Bitcoin, but frankly speaking, if gold investment works, Bitcoin investment may be better because it has smaller trading volume and less liquidity. There are more beta gains." Druckenmiller said on CNBC.

Concerns about inflation have become a standard explanation for the rise of Bitcoin, although there are some factors that complicate this statement. On the one hand, Ethereum, the second largest cryptocurrency by market capitalization, is also in a bull market, and its supply has no upper limit. And, in the past few years, fear of inflation has not been the first time. Investors often complain that the Fed is "printing money." During this period, Bitcoin sometimes rose and sometimes fell.

Right now, the regulation of cryptocurrencies is fragmented, with some things being handled by state governments, and some by different federal agencies. But in recent months, most of the regulatory decisions have been positive for cryptocurrencies.

Online payment company PayPal Holdings (PYPL) said last month that it had obtained a special license from the New York State Department of Financial Services as part of a plan to allow users to trade bitcoin.

Although Trump stated that he "dislikes" Bitcoin and the US Securities Regulatory Commission has also cracked down on alleged fraud by some cryptocurrency companies, institutions such as the US Commodity Futures Trading Commission have opened the door to various cryptocurrency services such as asset custody. . This kind of basically friendly regulation may continue. Edward Moya, an analyst at currency broker OANDA, pointed out that Gary Gensler, one of President-elect Biden 's senior advisers to financial regulation, "is considered to be friendly to cryptocurrencies."

Bitcoin has also been accepted by more companies-such as payment company Square-and has attracted new institutional funding. Statistics from the Chicago Mercantile Exchange (CME), which provides bitcoin futures, show that trading volumes have soared in recent weeks. The Chicago Mercantile Exchange told Barron’s that the open positions of large institutional holders in bitcoin futures contracts reached an all-time high. Compared with October, this month’s average daily transaction volume has increased by 7% to 7,900 contracts.

Nevertheless, Bitcoin is still being questioned. As prices continue to rise, well-known hedge fund investor Ray Dalio expressed his skepticism on Tuesday.

Dalio wrote on Twitter that considering the volatility of Bitcoin and the fact that you can't buy a lot of things with it, it is neither a good medium of exchange nor a good store of value. Even if governments have not tried to stop it so far, “if it succeeds enough to compete with currencies controlled by governments and pose a sufficient threat to government currencies, then governments will declare it illegal and make it illegal. Too dangerous to use."

"In addition, unlike gold, which is the third largest reserve asset held by central banks, I cannot imagine that central banks, large institutional investors, corporations or multinational corporations will use Bitcoin."

Nevertheless, he made it clear that he is willing to reconsider his position. "If my judgment on these things is wrong, I am happy to be corrected." he wrote.

*For the English version, see the report "Matthew C. Klein Divided Government May Push the Fed to Go Bigger. Here's What That Might Look Like." on November 17, 2020.

*The content of this article is for reference only. Investment advice does not represent the inclination of "Barron Weekly"; the market is risky and investment must be cautious.

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