‘When the facts change, I change my mind’: bitcoin’s time has come

ECONOMIST John Maynard Keynes has been quoted as saying ‘‘when the facts change, I change my mind’’. This quote is a useful reminder that in areas such as economics, facts can and do change. Holding dogmatic views without the capacity to reevaluate your thinking can be selflimiting at best and dangerous at worst.

Two years ago, if a client had asked me if bitcoin should be considered as an investment my response would most likely have been, probably not. At that time concerns around the security and custody arrangements, and the Wild West appearance of the developing cryptocurrency class, pointed to risks that were just too hard to quantify. In my mind, this disqualified it as a suitable investment candidate.

What a difference two years can make in a rapidly changing world. In a recent article by James Grigor, a fellow colleague and chartered financial analyst, he laid out the logic behind the emerging respectability of bitcoin. He makes a compelling argument in favour of having a modest exposure to bitcoin and the blockchain technology that forms its foundation. He commented as follows:

STORE OF VALUE Financial assets comprise the largest store of value in the world. The newest entrant is bitcoin.

A store of value is anything that holds its purchasing power in the future. It is a function of people’s perception of worth. Gold and oil have historically been reliable stores of value. Because they are scarce commodities, they make dependable hedges to inflation. As a result, they have commanded price premiums above and beyond the demand for their consumption alone.

For the past 75 years, the United States dollar has been a reliable store of value. This is a result of its comparatively good management by the Federal Reserve and the reputation of the United States economy. It is the most widely held currency in the world and recognised as the global reserve currency.

With that said, the investment thesis for bitcoin is both simple and compelling, hence its global appeal. It is (relatively) accessible to all, is accepted worldwide, is not controlled by a central bank and is limited to 21 million units. Bitcoin shares many of the same attractive properties of the United States dollar, oil and gold that have made them a great store of value for centuries, and bitcoin has modernised and improved properties that position it as an attractive complement. LEGITIMATE ASSET CLASS While bitcoin’s scarcity puts it alongside gold as a tool to help protect against currency debasement, there is increasing interest and participation in bitcoin among institutional investors. Why? The security and custody arrangements now make it a legitimate component of portfolio construction.

Entrants such as Fidelity and ICE (owners of the New York Stock Exchange) are bringing a high degree of trust and expertise to the custodianship of digital assets. Bitcoin can now be held safely like other hard assets such as gold.

Insurance providers such as Lloyds and AIG are now underwriting policies to protect digital asset custodians against theft and hacking, adding additional safeguards to keep investors assets protected.

COVID19

Like many technology companies this year, bitcoin has benefited from three years of digitalisation in three months. It has also benefited from the unprecedented reaction of governments and central banks to Covid19. The current macro environment will accelerate bitcoin adoption, introducing new investors to the space, and we expect a positive cumulative effect on its price.

VALUATION POTENTIAL Today, the market capitalisation of aboveground gold (gold already mined) is conservatively $US9 trillion ($NZ13.22 trillion). Using gold as a framework, the bull case scenario is that bitcoin is undervalued by a multiple of 45. In other words, the price of bitcoin could appreciate 45 times from where it is today, which means we could see a price of $US450,000 per bitcoin compared with the $US10,000 that it trades at today.

Bitcoin is not without risk. Investing in cryptocurrencies has regulatory risks, and high levels of price volatility can also be a deterrent. But the prospect of strong returns over longer periods is a powerful draw to investors. James recommends that remaining curious and holding a modest exposure to an asset class, that will gain increasing legitimacy over the coming years, makes sense.

However, caution is required and the size of the position in client portfolios should be relatively modest. I do hope that John Keynes would have approved of my change of mind, in response to the change in the facts about bitcoin.

Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.