Simon Lloyd – Chief Investment Officer
These days, you would be hard-pressed to find anyone who had not heard of Bitcoin. Given it is one of the most controversial investments in the market today, I would like to offer some brief thoughts on the matter.
Bitcoin is an example of a ‘cryptocurrency’ which is used and exchanged digitally as a decentralized form of money. Cryptocurrencies use ‘blockchain’ technology, which forms secure public ledgers that allow for the safe transfer and ownership of assets. Bitcoin is widely considered to be the first and most-refined user of blockchain technology, and may be called the ‘market-leader’ in its field.
Since its launch in 2009, Bitcoin’s price has skyrocketed from a fraction of a penny to over £24,110 at the time of writing, making it one of the most remarkable investments in the last decade.
The main thesis for Bitcoin advocates is that it provides a secure, non-paper currency that protects against the unprecedented levels of money printing initiated by centralized governments. The opposing view is that Bitcoin is a highly speculative investment fueled by irrational behaviors driven by the fear of missing out, explained by the ‘Greater Fools Theory’ – investors buy only with the expectation that the price will rise further and the investment can be sold on. In this theory, the price inevitably crashes as its true value comes to light.
The difficulty in estimating Bitcoin’s true value is that it essentially has no intrinsic worth, that is to say its value is solely determined by what people think it should be. It could be argued that fiat (ie paper) currencies face the same dilemma, however they tend to be on slightly better footing – by the very essence of being backed by a government which can collect tax revenues.
It is important to note that Bitcoin is, objectively, extremely volatile. It is not uncommon to see price movements in excess of 10% in any given day, and even drawdowns up to 80% of its value over a longer period. Even if one is comfortable with this level of risk, investors need to be conscious that this threatens its main thesis, which is to provide a de-centralised store of value and act as a currency.
Investors also need to be conscious that due to its anonymous-nature, Bitcoin is subject to fraud and theft, and is not recognised in the UK as legal tender (although capital gains are taxed). Individuals who invest in Bitcoin risk not being able to transfer the value back into money and have no legal recourse for theft.
One final point is bitcoin’s lack of ‘green’ credentials. The incredibly complex calculations used to maintain the distributed ledgers require immense computing power, the energy usage of which is said to be the equivalent of a small country. Much of this activity takes place in China and Russia with electricity sourced from coal-fired power stations making Bitcoin a ‘dirty’ currency.
Bitcoin is undoubtedly a complex investment with many other factors not considered in this article. As with any investment, but especially so for Bitcoin, you must carefully assess the risks before committing capital, and you should understand that the value of your investment can go down as well as up.