So why is investing in bitcoin becoming more mainstream? According to Forbes data, at least 7 million people worldwide have dabbled in bitcoin or digital currency investing.
While some might argue that it’s not an asset class, bitcoin seems to be one of the newest things being treated as such by sophisticated investors.
Bitcoin was created in 2009 and was predominantly traded by people who were tech and blockchain-savvy and very early adopters.
In recent years, amateur retail investors have jumped aboard the bandwagon in search of a yield, as banks offer next-to-no interest and property becomes even further out of the reach for younger Australians.
Recent research by crypto-focused media outlet “The Tokenist” found that nearly half of the millennials surveyed preferred bitcoin as opposed to an investment to stocks, real estate or gold.
The last six to 12 months have seen a marked interest by institutional investors who are looking at bitcoin as a viable investment, with many large-scale funds looking to expand their exposure to crypto coins and digital currencies.
So why has bitcoin become an instrument used by professional investors?
Bitcoin has been traded on the open market for long enough now that experienced traders are starting to see the same kinds of trends that we see in other kinds of assets: there are natural peaks and troughs.
Are we losing faith in money as we know it?
An additional reason bitcoin is now being treated more seriously is the growing discomfort institutional investors have with continued quantitative easing (i.e. printing of money and injecting it into the economy) and the heightened levels of government debt. Some investors are becoming concerned that government debt (i.e. bonds) is becoming risker than it once was.
Historically, institutions had always considered that the major countries of the world would never default on their debt, and so it was assumed that their bonds would always be repaid, thus creating the closest thing we have to a risk-free asset.
But as governments around the world take on record levels of debt and pump more and more money into financial ecosystems through quantitative easing, risk-free perceptions of government bonds are changing. What was once considered to be the ultimate risk-free asset is no longer considered so safe as it once was.
With this backdrop, investors have started to look to alternative asset classes to hedge against the instability in the established monetary system, and bitcoin seems to be taking its place as one of these hedge asset classes.
That said, we will see valuations fluctuate, depending on a range of factors. Unlike the price of gold being largely driven by economic cycles, we still do not know exactly what will drive valuation changes in bitcoin.
We have seen the price of digital coins fluctuate significantly, but we are currently seeing, a trajectory more similar to other asset classes. This also seems to be giving large-scale investors confidence that it is operating in a market with solid demand-supply characteristics.
Another factor that may be playing role is that bitcoin is finite. There are only 21 million coins and can never be more without a rewriting of the bitcoin protocol. This also lends itself to building confidence that it will continue to appreciate over time.
Dirk Steller is the managing partner of fintech-focused VC fund Seed Space Venture Capital.
