Wednesday's Market Minute: Wall Street Buys A Ticket To The Bitcoin Lotto

There are two unique things about this rally in bitcoin. The first is that it’s happening without much retail excitement. The second is that it’s happening almost entirely on its own – unaccompanied by stocks, gold, or other cryptocurrencies. That’s particularly interesting, because the state of financial markets today is a fairly precarious one.

COVID cases are surging, we’re in the middle of an awkward Presidential transition, and most economists agree we’re overdue on economic support from the government. Amid all this, investors are turning to… crypto! And it’s not just the Bubble Bros and hype-masters from way back when; it’s Wall Street legends like Paul Tudor Jones and Bill Miller who’ve gotten more vocal about the digital alternative to gold in an environment where they perceive inflation and dollar-devaluation to be a risk worth hedging. If we accept this use-case of bitcoin, it’s not hard to see why it’s gaining traction again.

Global negative-yielding debt is back at a record, and it looks like we’ll get another dose of fiscal stimulus on top of a couple doses of vaccine. Inflation and devaluation may not be happening now, but bitcoin moves with a higher beta to its underlying potential than any other asset in history. Even a small increase in the probability that its use-case will come true generates a huge response in price, because it’s basically an all-or-nothing bet on the financial system changing forever. In other words, it’s still very risky, very volatile, and that's exactly what Wall Street wants. Risk implies reward, and investors are getting hungry for reward. Data shows they’ve piled back into equities at a record pace, but the Nasdaq hasn’t made a new high since September and the S&P is up just 2.5% since learning Pfizer Inc. PFE and Moderna Inc MRNA would literally save the world.

Gold isn’t working and Treasuries have been selling off for three months. If you’re a money-manager out of ideas in a market where everything is on hold, why not take a shot at the lotto if the odds of winning just went up? The buyers behind this rally play higher stakes and that could mean a bigger pot, but make no mistake: the game hasn't changed.

Photo by Dmitry Demidko on Unsplash