The crypto currency revolution
As the cashless society looms, investors weigh up the digital options
ACOUPLE of years ago most people had never heard of Bitcoin; but the digital currency has attracted serious attention in recent months as its value has soared – with many investors hoping it can make them a lot of money.
But is it a passing craze – with risks of a bubble followed by a bust – or is it the next big thing?
Bitcoin is a ‘ cryptocurrency’ – meaning there are no notes or coins to handle as it only exists online.
The currency is capturing the imagination because there are no currency exchange charges when using it for a purchase overseas; and because central banks cannot devalue it by printing more.
The idea of a digital currency is not new as many countries are now steadily moving towards having a cashless society with the proportion of transactions carried out online or using credit and debit cards versus cash increasing each year. Only 42 per cent of UK transactions now involve cash.
But cryptocurrencies take it to another level – and the number of internet searches for Bitcoin has tripled since April.
Jeremy Gleeson, manager of the Axa Framlington Digital Economy fund, says: ‘A major driver of this trend is young people. Those aged under 35 have grown up with the internet and have always had the option to shop online – and nd they are now entering their r peak spending years.’
Businesses are assessing whether that spendi ng could be done in cryptocurrency.
Bitcoin is not the only digital currency – others include Litecoin and d Ethereum – and being able e to use them relies on complicated technology known as the Blockchain. This is essentially a mass i ve dat a base which stores details of where each bit of the cryptocurrency is and all transactions ns in it.
Guy Stephens, technical investment director at financial advice firm Rowan Dartington, says: ‘The technical detail on how the technology works is complex. What really matters is whether it is investable or ri is likely to become so.’ The astronomic rise in cryptocurrency has seen the price of one Bitcoin rocket from £ 540 a year ago to almost £5,997 today. But unless you are buying bu Bitcoin i t self, there are no other ways of getting direct exposure to the currency. Also, buying the currency now is betting that its value will continue to climb. This is a risky punt since Bitcoin has already seen huge peaks and troughs in its short lifetime. While demand in countries such as China has pushed the price up recently, there have also been serious concerns about the safety of using cryptocurrencies. Crucially, these currencies are not regulated by a central bank or government.
While advocates say this protects cryptocurrencies from being overregulated or devalued, others say it makes them more likely to be used by hackers, fraudsters and for illicit activities such as money laundering. Holders of Bitcoin have been left out of pocket more than once after hackers broke into the exchanges where the currency is stored online and stole millions.
Because the currency is not regulated, if it is stolen then you have no protection, unlike money kept in the bank which is covered by the financial services compensation scheme. Stephens says: ‘The golden rule of investment is to understand what you are buying. We are watching closely, but currently have no plans to invest in cryptocurrency and would only seriously consider if it becomes regulated.’
But experts say investors can gain exposure to the rise of cryptocurrencies if they think laterally about where they put their money. Companies whose goods and services tap into the technology can also benefit from the Bitcoin boom.
Two such businesses are US companies Nvidia and AMD. They make graphics processors, which have historically been used in computers to enable users to play games. But the processors are good at tackling the maths problems which Bitcoin miners need to solve to unlock coins. As a result, demand for their chips has soared.
But Axa’s Gleeson is cautious on the outlook. He says: ‘Bitcoin is volatile and subject to sporadic waves of demand. I would fear that demand for these chips could fall away as quickly as it came about.’
But he does invest in chip-maker Taiwan Semiconductor which makes chips for both Nvidia and AMD, so is an indirect beneficiary of any increase in demand either company experiences.
Damian Barry, senior investment manager at Seven Investment Management, invests in US firm Overstock. It is an online retailer but has a subsidiary called Medici Ventures which is involved with blockchain t echnology. It has launched tZero, a website where investors can trade digital assets such as cryptocurrencies.
Nathan Sweeney, senior investment manager at Architas, says: ‘It is likely that large companies which can afford to invest in this technology will be the ones to reap the benefits. That includes tech businesses and financial firms.’
Investing in a US tracker fund is one way to tap into demand for cryptocurrency. Sweeney says: ‘The Dow Jones i ndustrial average Exchange Traded Fund will give you exposure to firms such as Intel, which stands to benefit from this trend, and Goldman Sachs, which has been heavily investing in blockchain technology.’
He also likes the Robeco US Premium Equities fund, which invests in finance giants such as JP Morgan and Citigroup and the Polar Capital Technology fund which invests in technology companies including Microsoft and AMD. These two funds have returned 63 per cent and 117 per cent respectively over the past three years.
Gleeson says: ‘Maybe eventually cryptocurrencies will be the norm, but I think that is a long way off.’
For now, he is focusing on the more conventional digital currencies we already use. He invests in Apple and PayPal, for example, which have made buying and selling safely online the norm.
He also thinks Visa is a major beneficiary of the move to a cashless society as it makes money on every transaction made using one of its cards.
He adds: ‘We are only at the beginning of this digital journey and it represents a huge opportunity for investors.
‘But we only invest in something once it has been proven to be commercially successful and that can be a long road, a much longer road than people expect.’