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Demand-led rally lies behind Bitcoin outperformance


Shaun McDade, managing director for MitonOptimal has written a note on Bitcoin commenting that in a year of extraordinary events, no one much noticed the resurgence of Bitcoin, which, according to Bloomberg, has risen by 120.31 per cent in US Dollar terms, making it the world’s best performing ‘currency’ for the second year in a row.

McDade writes: “While it would take both brain power and a page far bigger than those at this writer’s disposal to fully explain the concept and mechanics of cryptocurrencies, amongst which Bitcoin is pre-eminent, they are, among other things, intended as an alternative/antidote to paper money. According to their proponents, whilst the era in which the number of Dollars, Pounds or Francs in circulation was backed by a corresponding stash of gold bullion meant that fiat currencies were once a genuine store of value, this ended with the abandonment of the gold standard (or, more accurately, the Bretton Woods Agreement, in 1974).

“Now, free of such restrictions, Central Banks print money at will and, it would seem, with impunity. As such, the promise printed on bank notes to “pay the bearer on demand”, which was once a binding and legal undertaking on the part of its issuer, is no longer worth the paper it is written on.
“Previously considered by many/most as the preserve of geeks, criminals and the conspiracy theorist ‘tinfoil hat brigade’, cryptocurrencies are attracting an increasing level of interest (and thus assuming an increasing level of ‘legitimacy’) from a far wider audience. Along with the growing number of mainstream businesses that accept Bitcoin as payment – Dell, Expedia, Home Depot, Microsoft, Virgin, to name a few – the creation of a Bitcoin exchange, an ETF and other funds that invest into Bitcoin has undoubtedly contributed to this.

“So too, however, have events such as the Indian authorities’ recent decision to remove high-denomination rupee notes from circulation. Though touted by the Modi administration as a ‘surgical strike’ against corruption and tax evasion, such action can also be interpreted as an attack on personal freedoms and, perhaps, the first in a series of steps that will ultimately abolish the use of cash (notes and coins) altogether.

“Though it might be tempting to interpret the surge in Bitcoin as an anti-establishment reaction to both this and the perceived threat of further government interference on personal liberties, or, indeed, the harbinger of the next global financial crisis, we think that is a long way wide of the mark. In this regard, we see it as instructive that Bitcoin’s strength has not been mirrored by another asset with which it shares many attributes, namely gold. In our view, the explanation is therefore far less sinister: with the value of Bitcoins in circulation a relatively modest (within the context of the global financial system) USD16 billion or so, it is a simple case of an old- fashioned demand-led rally driven by ‘more buyers than sellers’.

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