Should you buy Bitcoin?
It’s been the financial phenomenon of 2017. But if you haven’t already…
In a year in which stock markets boomed and Bank Rate took its first upward step in more than a decade, only one financial story has truly captured the public imagination: the rise (and rise, and rise again) of Bitcoin.
A year ago many, if not most, had probably never heard of it. Those who had probably dismissed it as a mysterious digital currency used primarily by criminals but with which, if you really wanted to, you could purchase hamburgers or T-shirts in a few hipster outlets.
Today, though, it is something different. It has been legitamised by major exhanges, such as the Chicago Mercantile Exchange, which now permit Bitcoin to be indirectly traded. Its rocketing price has created billionaires and – reportedly – enabled ordinary people everywhere to buy homes, quit jobs and retire early.
Its price can shed value or gain massively within mere minutes. It has risen by approximately 2,000pc in the past year – or 140pc in the last month – but each of these figures hides enormous swings in both directions. And, by the time you read this, they may both be wildly wrong.
Those who say you should own Bitcoin argue that this new currency represents a fundamental shift in the way society values and uses money. Ned Naylor-leyland (see right) is unusual in that he works within the traditional finance industry managing a $220m (£164m) portfolio of clients’ money – a 2pc slice of which he has chosen to invest in Bitcoin. He believes the rise of Bitcoin and other new currencies signals a major dissatisfaction with “fiat” or paper money systems, whose value many claim has been fundamentally undermined by central banks’ and governments’ policies such as quantitative easing.
Owning gold and Bitcoin – which he argues replicates gold, and in some ways is more attractive – is a protection against weaknesses inherent in existing money systems.
But the majority of traditional financiers have written Bitcoin off. It has been derided as at best a currency for criminals but also as nothing but a speculative fad and the “bubble of all bubbles”. Here, representing the “No” contingent, Will Hobbs of Barclays Wealth argues that it has no function and is thus essentially worthless.
Yes
You need to own Bitcoin
Ned Naylor-leyland Manager, Old Mutual Gold & Silver Fund, Old Mutual Global Investors
In my view, Bitcoin and gold are complementary assets. Bitcoin was explicitly designed to be digital gold and to replicate the mechanics of mining a finite resource.
Crucially, Bitcoin has started to remind people what money is, isn’t, and can be, restarting the wider conversation about “sound money” versus pure government fiat. This falls alongside an even wider conversation about payment systems, transparency and the overall financial architecture. Both Bitcoin and gold are assets that speak directly to the public’s underlying desire for independent, disciplined and “sound” money.
The “old” system of trusted third parties, which lacks transparency, is genuinely threatened by the emergence of this decentralised technology. This is a genie that I believe cannot be returned to its bottle. Once you understand what can be done and what efficiencies are going to be achieved, you cannot happily return to the old model.
Bitcoin also resolves the criticism of gold as lacking easy divisibility. I expect that a wider discussion of what money is and how it can return to what it was pre-1971 [when America ceased pegging the dollar to the price of gold] is an inevitable follow-on from the current cryptocurrency explosion.
I believe the ongoing recognition of Bitcoin and other cryptocurrencies will bring the ownership of disciplined money into the modern world, paving the way, in due course, for the return of gold as a global currency.
No
Don’t touch it Will Hobbs Head of investment strategy, Barclays Wealth
The frenzy surrounding Bitcoin is being fed by little more than price momentum. There has been no change in the fundamental prospects of the cryptocurrency this year. Unless Bitcoin finds itself a role in the global economy, its intrinsic value is essentially zero.
This role is elusive for a number of reasons. First, Bitcoin is currently a poor medium of exchange. As with all cryptocurrencies, participants in the Bitcoin network are not known to
‘Most boxes on the bubble checklist are already ticked’
each other. So in place of the trusted intermediary [such as a bank] which can be regulated, fined and sued, you have a cryptography process that is necessarily mathematically intense.
As a result of this, Bitcoin can only process up to seven transactions per second. This compares with Visa, for example, which processes around 2,000 transactions per second on average and can get up to 56,000 at peak. The point is that there is currently an inherent trade-off between security and speed. Bitcoin is also, in a sense, a victim of its own popularity.
The price volatility that has accompanied Bitcoin’s meteoric ascent jars with many of its adherents’ aspirations for it to be seen as a reliable store of value. From 2012 to 2017, Bitcoin’s annual returns were more than 100 times wilder than the most volatile assets we entertain – shares in emerging market companies.
All this being said, of course, the fear of missing out can be a powerful force when markets move as fast and as far as Bitcoin has. But it does not yet fulfil any of the criteria that we would look for in an investible asset, and for the reasons listed above we would continue to advise extreme caution.
Most boxes on the bubble checklist are already ticked; now all we await is a catalyst to spur the rout. This melee also contrasts to the other more conventional areas of the world’s capital markets that commentators have complained about being in bubble territory. Yes, bonds are expensive, but we still expect most to be paid back at the price at which they were issued. Meanwhile, stock market valuations are also above long-term averages, but with perhaps greater justification than is generally realised. Neither shares nor bonds fit the description or feel of a proper bubble.
‘Recognition of Bitcoin paves the way for the return of gold as a global currency’