EXPLAINED | Bitcoin More Than Tripled In 2020 To Breach $23K - Should You Invest?

The world's largest crypto-currency has more than tripled this year, buoyed by demand from larger investors attracted to its potential for quick gains.

(Representative Image/ Getty)

New Delhi: Bitcoin set a fresh all-time high on Thursday, after rising 10.5% to $22,655, just a day after smashing the $20,000 milestone for the first time, in what's been an eye-popping rally for the controversial digital asset this year. The world's largest crypto-currency has more than tripled this year, buoyed by demand from larger investors attracted to its potential for quick gains and perceived inflation-hedging qualities, vindicating forecasts that were scoffed at months ago and leading to even higher prognostications. With bitcoin's supply capped at 21 million, investors see in the cryptocurrency a hedge against the risk of inflation as governments and central banks turn on the stimulus taps in response to the COVID-19 pandemic. "I don't think the Bitcoin rally is due to the retail participation as yet. It's mostly due to the institutional investors, who ensure that a part of their balance sheet is invested in Bitcoin. This is leading to some shortage of Bitcoin and pushing the prices up. Indirectly, this is also bringing in retail investors to invest in Bitcoin," Sathvik Vishwanath, Co-founder & CEO, Unocoin, told ABP Network. A new asset class? Analysts believe that Bitcoin has emerged as a new asset class for investments. Crypto experts expect Bitcoins to cross the 1 trillion market cap by, currently, sub 400 billion, meaning the price may go beyond $50,000 in the next one year. "Bitcoin has once again proven its strength as a store of value. It has been proving itself for the last 10 years. Today, 50 Million people believe. Every time it proves itself, millions more start believing. Cheers to all the believers," said Nischal Shetty, Founder CEO of WazirX India, in a tweet. Rally backed by institutional investors: Institutional investors are now diversifying a part of their investments in the crypto-currency and taking cryptocurrencies more seriously. Alan Howard, billionaire hedger fund manager, is among the backers of a new institutional-focused investment firm, One River Asset Management, which will have about $1 billion in Bitcoin and fellow digital coin Ether by early next year. Financial institutions such as Fidelity Investments, JP Morgan, and public companies such as mobile payments firm Square are bullish on Bitcoin. Recently, Guggenheim Partners said it might invest up to 10% of its $5.3-billion Macro Opportunities Fund in a bitcoin trust. History of boom and bust: Going by recent past, Bitcoin surged about 1,000% in 2017 to cross $19,000, and a year later, it had dropped to less than $3,500. Bitcoin exchanges argue the cryptocurrency is muscling in on gold as a portfolio diversifier amid dollar weakness and potential inflationary pressure. At the same time, brokerage houses see speculative fervor that will inevitably lead to a bust akin to the meltdown three years ago. Regulation: In Indian and many other countries, Bitcoins remain unregulated, a trait that increases its appeal among its fans but at the same time drives the retail investors away. The volatile nature of the asset, which remains concentrated in very few hands, adding to its volatility and high risk among the retail investors. Should you invest? Experts suggest that retail investors can invest anywhere between 3-5% of their portfolio in Bitcoins, and that too should be done through SIP or systematic investment plan to reduce the risk of timing and volatility. Given high inflation and lower interest rates, allocating a part of one's investment in Bitcoin will ensure the value of their money stays and does not depreciate. However, some market participants feel otherwise. "Bitcoin is still uncharted territory for an average investor. Without proper compliance and safety net, this can't be a mainstream asset class. Investors with deep pockets and the ability to invest in transborder assets may try to benefit from the rising Bitcoin value," said a CEO of a Mumbai-based brokerage firm, which advised investors to take a cautious stance despite the significant gains in Bitcoin.