TOKYO — As an advertisement for an asset class, Tesla’s announcement this month that it would convert a sizeable chunk of its cash reserves into bitcoin seemed to be as good as it gets.
After all, here was the world’s richest man, Elon Musk, backing a plan to put $1.5 billion of his company’s money into the cryptocurrency. And many investors took the view that what is good enough for Musk and his electric vehicle and clean energy company Tesla is good enough for them.
The price of bitcoin soared after Tesla’s revelation to an all-time high of $48,000. Bitcoin has gained over 300% from a year ago — not far short of Tesla’s own dramatic rise in value over the same period.
“Tesla is not a particularly cash-rich company despite having a high valuation. That they’re spending 8% of cash on bitcoin indicates they have confidence in the value of bitcoin,” said Lennix Lai, financial markets director for crypto exchange OKEx.
In fact, from a trough last March to the current high, the world’s most traded cryptocurrency has behaved more like a hot tech stock than the reliable store of value that many of its advocates would like it to become.
Issued independently of governments and central banks — and in an algorithmically-limited amount — cryptocurrencies should withstand shocks in traditional markets. In theory, bitcoin should have behaved like a digital form of gold, the ultimate hedge asset.
The reality has been a big dip followed by recovery driven by some of the factors that have pushed equity markets to record levels, including vast amounts of government stimulus and extreme liquidity from central banks to try to nurse economies through the coronavirus pandemic.
“As much as we wanted to claim that bitcoin was moving opposite to the stock market, unfortunately cryptocurrencies moved the same way,” said Paolo Ardoino, chief technology officer of crypto exchange Bitfinex.
Cryptocurrencies lost up to 50% of their value last March — even worse than equity markets — as the coronavirus spooked investors last March. Retail investors rushed for the exits even as bitcoin’s staunchest believers called for the community to “hodl” — slang for long-term holding of cryptocurrencies through dips and gains.
Crashing alongside the Dow and S&P 500 tested not only the philosophy underlying the nascent asset class, but also its infrastructure. High trading volumes caused several exchanges to crash. On OKEx, wait times for transactions rose threefold, causing fees to similarly skyrocket.
“We didn’t sleep. It was really painful, everyone got liquidated,” said Lai. “We knew that it’s not the end of the world but we didn’t know how much time they needed to recover.”
One landmark in bitcoin’s recovery was when billionaire hedge fund manager Paul Tudor Jones came out as a “hodler,” announcing last May that he had nearly 2% of his assets in bitcoin and telling investors that his Tudor BVI Fund would trade bitcoin futures as an inflation hedge.
Since then, growth in bitcoin has…