Why this week's Bitcoin correction is different to 2017
We've been here before. In 2017, the buzz around Bitcoin hit fever pitch as the cryptocurrency surged to almost A$24,000 before crashing just as quickly. Over the past year the price has more than doubled the previous high water mark to reach A$53,994, but reversed much of that growth this week to now sit at A$43,764. So, is this correction a bump in the road or a repeat of 2017?
The heady days of 2017 saw speculators take a bet on Bitcoin, literally. Herd mentality was the order of the day, fueled by what is commonly referred to as FOMO (fear of missing out).
Couple this with the 'hot hand fallacy', an idea popularized by behavioral economist Richard Thaler in the movie The Big Short, where people make decisions based on the irrational assumption that good things are to come in the future simply because good things have happened in the past, and you have all the hallmarks of a bubble.
The near-vertical price trajectory we're seeing at the moment has some important differences.
Whereas the inflows in 2017 came mostly from speculators, this time it's largely driven by institutional investors.
"[Institutions are] attracted by the good returns that the digital asset class is currently offering but, more importantly, by the huge future potential it offers," says deVere CEO Nigel Green.
Some of these institutional players include the business intelligence and software firm MicroStrategy, now the largest corporate holder of Bitcoin, payments company Square, asset managers such as Guggenheim, and US insurance giant MassMutual.
PayPal is now also supporting the cryptocurrency, while investment banks such as JP Morgan and BlackRock are releasing research papers after previously shunning the asset.
This new-found institutional acceptance is down to a few things.
First, institutions are starting to view it as a hedge against the inflation many fear is on the way, fueled by a devalued US dollar following unprecedented levels of quantitative easing by the Federal Reserve.
"These emergency measures, like the massive money-printing agenda, reduce the value of traditional currencies like the dollar and raise the inflation threat," says Green.
"Bitcoin, like gold, acts as a shield."
Apollo Capital chief investment officer Henrik Andersson agrees.
"Investors are looking for a scarce asset and Bitcoin is in many people's eyes a better store of value than gold, and it can't be manipulated by politicians or central banks."
"You add the growth upside to this, and it looks very attractive for investors," says Andersson.
You can be sure there will also be a lot of speculative money following the institutional money.
"As some of the world's biggest institutions - amongst them multinational payment companies and Wall Street giants - pile ever more into crypto, bringing with them their enormous expertise and capital, this in turn, swells consumer interest," says Green.
Bitcoin's gold-like function as a safe-haven asset is gaining traction, especially among young people.
A deVere survey found that more than two-thirds of its millennial clients believe Bitcoin is a better safe-haven asset than gold.
Whether Bitcoin will rise to the status of gold over the long term is yet to be seen, so retail investors looking to buy it for this purpose should tread carefully. Indeed, it's hard to think of any defensive asset in history that has grown over 630% in less than a year.