Bitcoin has been on a roller coaster ride lately. The leading crypto-currency plunged as much as 21 percent from Sunday to Monday to as low as $32,389. The fall came just days after bitcoin soared 40 percent at the beginning of the new year to reach an all-time high of nearly $42,000.
Bitcoin’s volatility risk is rising with its price. The crypto-currency climbed from around $7,000 at the start of 2020 to a level above $29,000 at the end of the year, gaining more than 300 percent throughout the period.
Analysts generally believe that global risk aversion has been the dominant driver behind the crypto-currency’s rally. COVID-19’s hit on the global economy has pushed governments around the world to adopt unconventional monetary easing measures and roll out huge stimulus packages to ride out the economic downturn.
As a result, global inflation expectations have risen, accompanied by low growth and extremely low interest rates. The financial environment has driven up investor demand for safe-haven assets to hedge against possible inflation in the coming months. And bitcoin has been seen as one of the hedge tools against a spike in inflation.
While bitcoin has no intrinsic worth and cannot generate a stream of future dividends for valuation, its scarcity has attracted significant interest from wild investors. The bitcoin market value is estimated at less than 2 percent of the value of all the gold already unearthed, and crypto-currencies can be easily stored and even used in certain settings.
Yet, it is also because of the tiny club of the bitcoin community that the growing interest in the digital currency has pushed it to the new height.
And bitcoin rapid surge has further drawn the attention of more investors. In fact, there has already been a large influx of institutional investors including hedge funds, pension schemes and investment trusts. For instance, British fund manager Ruffer Investment Management has reportedly allocated around 2.7 percent of Ruffer’s total assets in bitcoin, while Massachusetts Mutual Life Insurance Co has become one of the biggest legacy investors in bitcoin.
It is conceivable that a 300 percent gain a year will certainly generate even more speculative capital inflow into bitcoin. When a large amount of speculative capital chases the virtual currency, high market volatility is bound to follow.
Some people think the recent rally in bitcoin is different to the bubble of 2017 when the crypto-currency skyrocketed about 20-fold to hit $20,000 before plummeting to $3,000 in 2018. Yet, the speculative risk in wide price swings is always there. The world economy should keep vigilant about the increasing volatility in this crypto-currency.
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