Market Watch: Bitcoin crash and where the ‘hot money’ is headed

Wall Street and the local NZX investors have hit the pause button.

Speculative assets like cyptocurrency have seen huge falls, with Bitcoin crashing by more than 50 per cent in just a few days last month.

What’s behind the investor nerves and where will the smart money head in the year ahead?

There were two main reasons for the Bitcoin crash says Pie Funds chief executive Mike Taylor.

“The first is that there has been a clampdown, from regulatory perspective, for cryptos,” he said. “With tighter regulation there is the fear that it can no longer be used as a default for criminal activity. One of the first things people ask for with cyber-crime is to be paid in Bitcoin.”

The other reason for the crash was a broader one that was also spooking investors in more traditional asset classes.

“Markets have become concerned about inflation and an asset-bubble that could be pricked by higher [interest] rates.”

“Bitcoin is being used as a speculative asset and as we’re reining in some of that speculation, some of what you might call ‘hot money’ s coming out of Bitcoin and other cryptos.”

Taylor said his personal view is that cryptocurrencies are not an investment-grade asset.

“If you look at the commodities and other assets that are used as an inflation hedge, they have a secondary use. Gold has a secondary use,” he said. “I don’t think we can consider criminal activity a secondary use.”

Taylor said his view was that cryptocurrencies like Bitcoin would eventually be regulated out of relevance.

“I just don’t see a world where central banks and governments are going to allow those types of currencies to be adopted formally. They’ll just use their own type of digital currency. Bitcoin is just pure speculation”

But more traditional market also starting to cool begs the question, where will the hot money flow?

Some of the falls on the NZX may have been specific to one or big stocks on the index.

For example, a2 Milk which was at one point the largest company on the NZX-50 by market cap has seen its value fall about 50 per cent since the start of the year.

Money has also come out of sectors that had been running hot in 2020 – like tech and renewable energy stocks.

“I think investors at this moment need to look at the underlying growth assumptions of businesses,” Taylor said.

“When we look around the world we see much more value in Asia, in emerging markets and specifically in Europe.”

European economic growth and sentiment around the recovery was strong.

Meanwhile, the European Central Bank was likely to be more cautious with potential rate hikes after many years battling deflation, he said.

“Of all the countries and regions in the world [to raise rates] probably Europe will be the last,” he said. “Which does bode well for their market.”

– The Market Watch video show is produced in association with Pie Funds.

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