Bitcoin boom backstopped by central banks’ easy-money policies

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This article is part of the FT’s Runaway Markets series.

A flood of central bank stimulus and widening interest among retail and institutional investors has sustained the rally in cryptocurrencies, analysts say, even as sceptics warn that the market is in the midst of a bubble.

Bitcoin kicked off February at just above $36,000, about $5,000 beneath the all-time peak it hit last month.

The digital currency briefly wobbled after reaching the high in early January, but has so far avoided a repeat of the brutal crash in 2017. Some investors put that down to a deluge of central bank stimulus, which has inflated the price of assets globally and triggered a frantic hunt for returns.

“The amount of liquidity that has been injected in the system has found its way into a lot of different assets, including alternatives such as bitcoin,” said Francesca Fornasari, a fund manager at Insight Investment.

At the same time, professional and amateur investors are beginning to play a more active role in the crypto market.

“In 2012 it was mostly geeks, anarchists and libertarians in crypto,” said Marc Bernegger, a Zurich-based board member of Crypto Finance Group, a broker and asset manager. “The profile of people entering into bitcoin has definitely changed.”

Many remain sceptical, however, and worry that the sharp price rises reflect increasingly frothy market conditions. For them, bitcoin’s gains echo the recent volatility in share prices of companies like GameStop and AMC Entertainment, as well as a sudden surge this week in the price of silver.

The moves in all three markets involved an influx of retail traders, armed with increasingly sophisticated tools and often stuck at home because of coronavirus lockdowns. Some brokerages such as Robinhood allow traders to bet both on the price of stocks and cryptocurrencies.

Since a sharp fall during the broad market ructions last March, bitcoin’s value has increased by nine times. The boom has caused parts of the traditional financial community to take notice, with some banks beginning to cover the market as part of their research offerings.

San Francisco-based Coinbase is preparing for a direct listing that would give investors their first chance to buy shares in a big US-listed cryptocurrency exchange.

The planned debut comes as investors are already chasing other proxies for investing in digital tokens without having to hold them outright. Last year, investors poured $5.7bn into cryptocurrency trusts managed by Grayscale, the favoured investment channel of many traditional traders dipping their toes into bitcoin. The figure amounted to more than four times the total net inflows between 2013 and 2019. Most of Grayscale’s inflows come from institutional investors.

Data from Chainalysis, a specialist cryptocurrency analytics company, also show an increase in institutions’ purchases of bitcoin, and a rise in average transaction sizes since November.