As the flagship of cryptocurrencies BitCoin has had an impressive year so far for all those who have invested in it. After getting over the initial shock of the Covid-19 that wiped out about 30% of its value it has rallied back to post returns on a year to date (YTD) basis that are outperforming gold, silver, equities and other investment options. This may be attributed to a pending reduction in the number of new BitCoin to be produced going forward known as halving.
It’s been a tumultuous period for most investments as panic about impending recessions and general economic chaos as a result of most countries going into lockdown to curtail the spread of the coronavirus. Lockdowns have affected among other things business operations, international trade, manufacturing and retail. In times of trouble investors normally seek less risky assets to invest. In the past, these have mainly been represented by commodities such as gold and silver which have an enduring value.
The value of money when economies are under pressure is threatened by the likelihood of governments being forced to resort to quantitative easing which we commonly refer to as printing money. This is the process by which governments encouraging spending by increasing the money supply through bailouts and other measures. Savvy investors will shy away from investments that depend on money for valuation. Hence gold fares well because its value does not depend on a single currency. It seems investors have chosen BitCoin as a haven asset.
The thought is not so far fetched. Zimbabwe as a case study is proof of this, or at least was. Tired of the central bank and governments dealings around money and having learned from the past Zimbabweans were among those very eager to adopt cryptocurrency before the central bank stepped in and outlawed cryptocurrency dealing and exchanges.
Over the past four months, the price of bitcoin has risen from January levels around US$7000 to current levels of US$9300. Despite a major crash in March that wiped more than US$4,000 from its value. In the same period, gold has only risen by around 13 per cent, while silver has fallen by 14 per cent and crude oil has dropped by more than 70 per cent in value.
Bitcoin’s recovery comes less than two weeks ahead of a rare event known as a halving, whereby the number of new bitcoins created will fall by 50 per cent. It is only the third time a halving has happened in bitcoin’s 11-year history and some market analysts believe it could push the crypto currency’s price to new all-time highs this year.
Although it has proven a good bet on a YTD basis so far as compared to other alternatives BitCoin is still not a walk in the park. BitCoin is firstly not as liquid as other investments. Yes, there are many exchanges set up out there but from a territory like Zimbabwe, it requires one to jump through hoops to realise your gains. Secondly, the lack of an underlying asset is still of concern. While the gains have been made if the only driver of its value is as a haven it may not prove a wise investment option in the long run if and when things return to normal. Finally as pointed our before it is prone to extreme volatility having lost so much value earlier in the year.