Bitcoin's Recent Surge Creates New Billionaires

18 Jan 2021, 09:44 · Views 6,766

Bitcoin's Recent Surge Creates New Billionaires

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(Forbes) - In the investing world, money talks. On rare occasions, however, vindication is even better than a giant mountain of cash.

Over the past decade, the true believers of the cryptocurrency revolution have turned what was once considered an oddball peanut gallery in the financial world into the next trillion-dollar asset class. And as they count their digital coins, they're ready to take a bow.

Over the past year, the gravity-defying stock market has given most investors a reason to grin, but none are smiling wider than bitcoin holders. While the S&P 500 has jumped 17% from the start of January 2020 through January 11, 2021, Bitcoin has spiked 400% in that same time, breaching $40,000 a coin and sweeping other digital assets into its rising tide.

All cryptocurrencies are now collectively worth more than $920 billion, according to cryptocurrency research site Messari, down from roughly $1 trillion on Friday.

One key factor driving the frenzy: As Covid led the Federal Reserve to print trillions of dollars to stimulate the economy and head off a recession, investors increasingly saw bitcoin as a hedge against inflation. Unlike the 2017 price rally from $1,000 to $19,000, which was driven by retail investors, the recent uptick has been propelled by large institutional investments and a proliferation of ways to buy and store crypto.

In 2020, payments giant Square used $50 million of its corporate treasury to buy Bitcoin—an investment now valued at $161 million. Hedge fund billionaire Paul Tudor Jones said as much as 2% of his assets were in crypto, and private equity giant Northern Trust revealed plans to make it easier for its clients to store Bitcoin, Ethereum, XRP, Litecoin, and Bitcoin Cash.

PayPal lets its 300 million customers buy bitcoin and spend it at any of the 26 million merchants it supports. Along the way, some crypto investors have gotten very rich. At least five have recently crossed into the billionaire ranks, possibly quite a few more.

Read more from the original article here.

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Any individual who followed Matt Damon’s advice that “fortune favors the brave” during the Super Bowl and invested $1,000 in the crypto markets have seen staggering losses, with the value of those assets dropping more than 60 %. This small slice of activity in the crypto markets demonstrates two major issues with this new asset class: its historical volatility and a lack of education about these assets among most would-be investors. Given that, as well as a cautionary regulatory environment, it’s clear that at this time, crypto has no place in defined-contribution plan lineups. This hasn’t stopped some DC plan administrators from soon making digital assets available to plan participants, if the plan sponsor decides to make this feature available. Read: This is why bitcoin won’t ‘diversify’ your 401(k) Defined-contribution plan sponsors will likely keep a close eye on these moves to make crypto more accessible to DC plan participants. For now though, we at Mercer do not view cryptocurrency or crypto-related assets as suitable investment options in a defined-contribution plan. Here are three key reasons why: 1. Volatility Proponents of cryptocurrencies point out that Bitcoin last year became the highest performing asset class of the decade, with an annualized return of 230 percent, when its price reached $60,000. But since then, its price has dropped precipitously, sitting at around $21,500 as of July 27. Of course, much of the stock market has entered bear market territory, bringing crypto along with it. But volatility is par for the course in crypto. According to a Mercer analysis, the annualized standard deviation of monthly returns of Bitcoin from 2015 to 2020 was approximately 80 percent, at least four times the volatility of publicly traded equities. Many experienced crypto investors may understand that these new markets reach new highs then crash in cycles, but it’s likely that most defined-contribution plan participants do not. Most participants don’t have the appetite for such high volatility—after all, as the primary vehicle that people rely on for their retirements, DC plans generally avoid making highly volatile asset classes available to participants on a stand-alone basis. Read: Why target-date funds may be sabotaging your retirement 2. Lack of education Given the amount of mainstream coverage around crypto, it can be assumed that these assets have become mainstream. However, only 16% of Americans said last year that they have invested in them. Based on Mercer’s work with some of the largest defined-contribution plan administrators, much is still to be done to educate plan participants on building a portfolio with crypto assets. This is vital, as learning about these markets can be confusing and time-consuming—a sobering fact in the face of Americans’ lack of financial literacy and their desire for professionals to help them plan for retirement. Learn how to shake up your financial routine at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. Join Carrie Schwab, president of the Charles Schwab Foundation. 3. The regulatory environment Although many in the crypto industry cheered when President Joe Biden signed an executive order in March instructing federal agencies to study and report on digital assets, there are plenty of reasons to be concerned that the regulatory environment around crypto may create more confusion in the markets. The day after the president’s order, the Department of Labor warned 401(k) plans to “exercise extreme care” about including crypto in portfolios. The agency wrote, “At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” The department cited crypto’s speculative and volatile nature as well as the difficulty to understand them as factors in its warning. (There is pending litigation against the DOL seeking to vacate this guidance, stating that where “assets may be invested should not be subject to the arbitrary whims of an agency that has no such authority.”)

Given the rapid decline of crypto markets, many believe regulators may soon place restrictions on the market. Hence, it’s prudent for defined-contribution plan sponsors to take a data-driven approach to including these assets in DC plan menus, despite a likely small minority of participants who may be requesting them. The crypto markets are constantly evolving, so it’s possible that the factors outlined above may be mitigated. But until then, we at Mercer feel that crypto does not belong in retirement accounts. Holly Verdeyen is partner and U.S. Defined Contribution Leader at asset management firm Mercer. Click here to see Mercer’s important notices.

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