Bigger investments into Bitcoin may be able to move its price significantly.
The largest cryptocurrency has doubled so far in 2021 as institutions and retail investors pour in cash, not to mention Tesla Inc’s $1.5 billion purchase and all the buying from MicroStrategy Inc. JPMorgan Chase & Co. strategists have estimated that institutional flows into Bitcoin are up 20% in dollar terms this quarter from the prior period, while retail has increased 90%. And that intake may be moving the price of Bitcoin more than it would some other assets, according to strategists at Bank of America Corp. including Francisco Blanch and Savita Subramanian.
“Bitcoin is extremely sensitive to increased dollar demand,” the BofA strategists said in a note Wednesday. “We estimate a net inflow into Bitcoin of just $93 million would result in the price appreciation of 1%, while the similar figure for gold would be closer to $2 billion or 20 times higher. In contrast, the same analysis for the 20-year-plus Treasuries shows that multibillion money flows do not have a significant impact on price, pointing to the much larger and stable nature of the U.S. Treasuries markets.”
Cryptocurrencies have been gaining credibility as an asset class as a robust products and derivatives market develops, institutions come into space and prices appreciate. Bitcoin is seen by some as an appealing digital alternative to gold or a potential refuge from inflation due to its limited supply. Still, some see a speculative bubble, and concerns loom about issues like energy usage and actual value. BofA notes that since about 95% of total Bitcoin is owned by the top 2.4% of addresses with the largest balances, it’s “impractical as a payments mechanism or even as an investment vehicle.”
Bitcoin’s bull run looks set to continue after the Federal Reserve reconfirmed its pre-stimulus stance this week.
The price rise came as 10-year U.S. Treasury bond yields topped 1.75%, a day after Federal Reserve Chair Jerome Powell on Wednesday signaled that policymakers at the central banks would keep monetary policy at unusually loose levels for the foreseeable future to give the economy more time to heal. Such a stance could allow output and employment to recover quickly, potentially fueling a rapid reheating that could ultimately lead to faster inflation.
The higher Treasury bond yields reflect investors’ demand for extra returns to compensate for the risk of inflation. A growing number of investors are betting that bitcoin might act as a hedge against a decline in the dollar’s purchasing power, and the German lender Deutsche Bank published a report this week stating that bitcoin is “now too important to ignore” given its $1 trillion market capitalization.
Powell pushed back against speculation of an early unwinding of monetary stimulus on Wednesday, boosting the appeal of inflation hedges such as bitcoin.
Yield worries persist:
Bitcoin bulls will be keeping an eye on the U.S. bond market because a faster rise in yields could weigh on equities, inviting selling pressure for bitcoin, too.
“A rise in yields is a problematic period, but a speedy ascent can destabilize markets,” Kruger told CoinDesk in a Telegram chat.
Equities and bitcoin took a hit in the last week of February, with the cryptocurrency falling by 20% as the 10-year yield spiked to 12-month highs above 1.5%.
Similar downturns could be seen if the yield continues to rise. At press time, the 10-year bond is seen at a 14-month high of 1.72% versus 1.62% pre-Fed Reserve announcement and 1.52% a week ago. The Fed’s reassurance of continued stimulus support has so far failed to keep the benchmark yield from extending its recent rise.
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