Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

Photographer: CARL DE SOUZA/AFP

Photographer: CARL DE SOUZA/AFP

Bitcoin is doing that thing again.After a 50% slump in the cryptocurrencys price toabout $4,000 in mid-March,whenCovid-19 panic was grippingthe financial markets,it has bounced back to tradeat about $11,200.Veteran crypto-watchers have seen this rapid shift from fear to greed many times before, and know it can have painful consequences.

The first time Bitcoins price went past five figures in 2017, it fueled a speculative frenzy that ended almost as soon as it began, leading to an80% slumpover 12 months. And when Bitcoin rose above $10,000 in February this year, any hope for a rally was snuffed out by Covid. The subsequent mad rush to trade digital coins for cashwas made worseby the fact that many people were using large amounts of debtto back their trading. Several crypto hedge funds closed.

The cryptocurrency has doubled in two months, and not for the first time

Source: Bloomberg

Is anything different this time? Bitcoins wild price swings undermine its case as a reliable store of value or safe haven.Its still 43% below its high of almost $20,000. But as a store of fear Warren Buffetts description of the short-term pessimism that pushes investors into cryptocurrencyit has its fans.

As with gold, whose price has soared as central banks and governments spend trillions of dollars to fight the pandemic recession, some big New York names are talking up Bitcoin as a hedge against an inflationary spiral or currency crisis.Citing its algorithmically-controlled supply cap of 21 million, billionaire investor Paul Tudor Jones praised Bitcoins scarcity premiumin May and said between 1% and 2% of his assets were held in the digital currency as protection ina low-interest-rate world. Medallion, the flagshipfund of quant specialistRenaissance Technologies, got the go-ahead to invest in Bitcoin futures in April.

Fear of a low-rate environment is driving greed for gold and its digital cousin

Source: Bloomberg

This market narrative of insurance against the financial apocalypse (almost like a grown-up version of the money printer go brrr meme)has some logic to it.

The recent stimulus-fueled stock-market rally has left 71% of fund managers thinking equities are overvalued, according to a Bank of America July survey. Diversifying into gold might make sense, particularly in a world where Covid-19 cases are flaring up once more. And for the fund manager forced to find winners in a market where everythings up, a bit of Bitcoin might also work as schmuck insurance if the tenfold price rise it experienced in 2017 were ever to repeat itself. Bitcoin is more volatile than and less correlated to gold and equities these days, according to research firm Kaiko. Thats what makes it attractive to some risk-hungry hedge funds, who make their living from market swings.

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The snag is just how dangerously unpredictable Bitcoin is even when compared with gold, which has a habit of not doing what bankers expect. Demand for Bitcoin is speculative and emotional, rather than tied to fundamentals such as adoption of virtual currencies as an everyday payment method. And supply is squeezed artificially, not just algorithmically. An estimated 60% of Bitcoinsupply is hoardedand 20%lost or untouched, according to research firm Chainalysis.

As more hedge-fund sharks (and day-trader minnows who want to keep up with Tudor Jonesand his ilk) head back into the murky waters of Bitcoin, theyll be swimming alongside the whales, the big crypto investors who hold their fortunes in digital coin.The market moves of these individuals tend to thrashthe price around.

Crypto's paper millionaires are growing in number, but they're still a minority

Source: bitinfocharts

Some whales will probably be looking for opportunities to cash out after life-changing gains.Investors holding between 1,000 and 1 million Bitcoin account for 42% of all Bitcoin supply.

As my Bloomberg Opinion colleague Aaron Brown put it last year: I doubt they (the whales) have infinite patience, and without significant growth in actual use, I would expect them to quietly withdraw to chase other promising technologies. So far, the market moves have been pretty noisy. Last year, a single large Bitcoin sale knocked 10% off its price. When the next sell-off hits, some of the harshest hedge fund critics of central-bank stimulus might wish for a bailout of their own.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:Lionel Laurent at llaurent2@bloomberg.net

To contact the editor responsible for this story:James Boxell at jboxell@bloomberg.net

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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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Bitcoin's Hedge Fund Sharks Are Swimming With The Whales - Bloomberg