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Bitcoin: a symptom of market mania — or the new gold?



The price of bitcoin has soared eightfold since March. It was $5,000 a coin then. It was over $40,000 this week.

It is one of the best performing things you could have held since the pandemic began. That will have felt great for its early adopters. But it now leaves pretty much everyone in the markets in something of a quandary.

Do we buy or do we sell? This is the royal we . . . my own bitcoin holding is not big enough to bother selling. Is the exponential rise in the price of bitcoin yet another symptom of the outbreak of speculative mania in markets, a spillover from the rampant overvaluation of the US tech sector that will eventually prove to have no intrinsic value at all and fall to zero or thereabouts?

Think Tesla with no actual cars. Or is it something else altogether — less a mania in the tradition of tulip bulbs and Beanie Babies and more an anti-mania in the tradition of gold?

Think of the reasons to hold gold. If inflation is coming (and it probably is) you want to hold a real asset that can hedge against it — one that can’t be inflated away by relentless money creation and currency debasement. That’s particularly the case in an era of very low interest rates. If governments work to keep interest rates lower than inflation in order to reduce the real value of their horrible debt burdens, everyone knows they need a safe haven, but everyone also knows the traditional ones (government bonds) no longer offer that safe haven.

That turns us to gold, the one asset that has a 3,000-year record of protecting purchasing power. No wonder the gold price is up around 40 per cent since 2018.

I hold a lot of gold for all these reasons. But here’s the thing. Might bitcoin be better at being gold than gold? The managers of the new SkyBridge Bitcoin Fund certainly think so. The supply of gold isn’t completely static, they say — it rises at about 1.25 per cent a year as more is mined. It can be expensive to store and tricky to transfer around the place in its physical form. It is easily confiscated and it isn’t particularly easily divisible in a hurry.

Bitcoin has none of these drawbacks. The supply is inelastic and capped (only 21m digital coins will ever exist). You can send it around the place as easily as you would an email (as long as you don’t lose the codes that allow you to access it). It’s fungible, resilient, verifiable, independent of any government and crucially easily divisible (I own a total of 0.0066 of a bitcoin).

Transactions in it are permanent and immutable: no institution can erase them. You get the idea. Finally it is a millennial thing. A generational transfer of wealth will gain speed over the next 20 to 30 years. When “wealth is owned by younger people . . . digital currencies will gain preference relative to anachronistic gold,” says SkyBridge.

Add it all up and it makes perfect sense. SkyBridge analysts are not alone in their passion here. The big driver behind the recent rise in the price of bitcoin has been institutional adoption, with fund and wealth managers beginning to see bitcoin as a legitimate portfolio diversifier.

In the UK the big news has been Ruffer, the investment manager, putting around 2.5 per cent of its Ruffer Multi-Strategies Fund into bitcoin at the end of last year (good call so far!) on the basis that the current macroeconomic environment (extreme monetary policy, ballooning public debt, anger at governments) provides the perfect environment for an asset that “blends the benefits of technology and gold”.

You’ll be ready to buy in by now. So how rich will it make you? The bulls like to start with the size of the gold market (the value of all gold above ground at the moment is about $12tn) and go from there. This brings JPMorgan to suggest a long-term price possibility of $146,000 and cryptocurrency investor Tyler Winklevoss to offer $500,000 as a “conservative target” if bitcoin becomes a “gold disrupter” and no upper limit at all if it ends up being commonly used as a payments network rather than just another asset to hold and pray over.

A year ago that would have sounded nuts. Now, it looks as if a wave of mainstream institutional investment is really under way — watch out for the multi-asset fund your pension pot is invested in acquiring some). The network is expanding. It appears to sound perfectly reasonable to a large part of the market. $1m here we come.

OK. Let’s come back to earth. Bitcoin has passed a lot of milestones. It has got this far without being banned by governments. It has achieved institutional acceptance (making it much less likely to be banned in future). It has hung on to its number one crypto status and it has made everyone who said it was going to zero feel a bit silly (and a bit poorer than they needed to be).

But none of these things give it intrinsic value. For that, bitcoin needs not just the scarcity its fans rave about: scarcity does not in itself give a thing value. It needs more active investors, it needs a much deeper and more liquid market (only a tiny part of the bitcoin market is ever traded — hence its volatility) and it needs wider acceptance.

All these things may happen. And I’ll be buying a little more as a hedge against that — not so much as to ruin me if it goes to zero, enough so that I don’t feel too awful at $500,000.

But the euphoric price rises of the last few weeks still scream mania at me. There is hysterical anger on social media against critics of the oddly specific targets. When no one knows anything, why say $146,000, why not “around $150,000”. Then there are crashed platform websites — Coinbase had a bad day on Wednesday. All these things will have a familiar feel to bubble watchers.

My go-to inflation hedge will remain gold for the simple reason that it isn’t new. I’m nervous about the next few years and I want a portfolio protector that has a multi millennium record in the safe haven top spot. I’m also going to take the main lesson from bitcoin (when fixed supply meets rising demand, prices soar) and bump up my general commodity holdings. As economies recover this year they might not rise eight times, but they should see the same (short term at least) dynamic that has made bitcoin do so.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. Twitter: @MerrynSW

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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Wall Street stocks climb as traders look past weak growth data




Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.

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