The Digital Gold Rush

Booming Bitcoin has QUADRUPLED in price in a year. Is it the new safe haven – or heading for another crash in...

IN THESE strangest of times it shouldn’t come as a surprise that one of the biggest investment winners has nothing to do with real money. It is ‘cryptocurrency’ Bitcoin. But investment experts are divided over whether its recent surge in price can be sustained.

While some, such as asset manager Ruffer, have embraced it within their investment portfolios, others fear it could be heading for a sharp fall – as happened in early 2018.

Mark Ward, head of trading at wealth manager Sanlam UK, warns: ‘ The current price of Bitcoin represents danger for investors. It is primed for the next downward move.’

Yesterday, Bitcoin broke through the $30,000 (£22,000) barrier, hitting $30,823 at 1:13pm, just weeks after rising above $20,000 for the first time.

It is more than four times its value at the start of 2020 when it traded at $7,175 (£5,320). A decade ago, you could buy it for 7p.

Despite this meteoric rise, most investors have little idea what a Bitcoin is – and mystery surrounds what makes it valuable. In simple terms, Bitcoin is a computer file stored in a ‘virtual wallet’. It can either be saved or traded for goods and services from businesses that accept the technology.

It is called a cryptocurrency because the computer programme used to make Bitcoin employs cryptography – or secret codes. This provides a layer of security to stop hackers stealing it.

A record of all Bitcoin is kept within a ‘blockchain’. This is a database containing details of all transactions that have taken place and it provides a marketplace where buyers and sellers can trade their Bitcoin.

Its origins are steeped in mystery – having been created in 2009 by an enigmatic Japanese computer coding expert calling himself Satoshi Nakamoto.

The number of Bitcoins in circulation will never exceed 21 million due to the way computer software used to create the currency has been engineered.

Any new currency can initially only be found through an online exploration process known as ‘mining’. So far 19 million have been mined using super-powerful computers that go through reams of mathematical permutations to find the hidden codes.

Financial consultants at deVere believe it is this finite limit that has been responsible for Bitcoin soaring in value. Nigel Green, chief executive of deVere, says: ‘ We believe this cryptocurrency is the future of money. The staggering pace of the digitalisation of our lives, with increased use of computers and online trading, means digital money is here to stay.’

He adds: ‘When facing times of trouble – such as those we are in right now – central banks are forced to print more money to support their economies. This depresses the value of traditional currencies. But Bitcoin is a safe haven asset that is not devalued. As a borderless currency it suits the modern world.’

Late last year, asset manager Ruffer snapped up Bitcoin worth at least $745 million (£563 million) as ‘a defensive move’ – saying it was hedging against a potential devaluation of major world currencies.

This could happen, it said, as a result of rising debt caused by governments bailing out economies hit by Covid- 19. Duncan MacInnes, investment director at Ruffer, says: ‘ Our move i s about spreading investment risk. We have invested 2.5 per cent of our entire $27 billion of assets in Bitcoin as an insurance policy – just as we have put money into gold and government bonds.

‘It’s primarily a defensive move but shows how an anti-establishment favourite is now becoming a mainstream option for major institutions to adopt.’

In October, online payment system PayPal, which recently opened its doors to cryptocurrency trading, doubled the weekly buying limit from $10,000 to $20,000. This caused

Bitcoin to soar in value. The last time Bitcoin hit great heights was in December 2017 – when it reached a then record $19,783. The following year it plummeted to $3,136. This fall was partly due to a suspicion that the price rise had been manipulated by a single buyer.

Sanlam UK’s Ward is concerned that the recent surge in Bitcoin’s value is not a good omen.

He says: ‘Its current price represents danger for investors – just like it did three years ago before there was a spectacular crash. Bitcoin is primed for the next downward move.’ He adds: ‘I fear a pattern is emerging that points to a fall. The value of Bitcoin rises, and then it gains mainstream attention with new investors drawn in by the fear of missing out. At this point larger players cash out and prices tumble.’

Others share his concerns. Ryan Hughes, of wealth manager AJ Bell, says: ‘ The old investment adage about never investing in something you do not fully understand has been thrown out of the window with this cryptocurrency.

People have simply not wanted to be left behind.’ But he warns: ‘A major problem is that there is no way of giving Bitcoin an accurate valuation. This is a classic feature of an investment bubble.’

Some speculators have been attracted to Bitcoin because it has been described as ‘digital gold’ – a safe haven. But Ward believes such a term is misleading.

He says: ‘Just like gold, Bitcoin has a finite supply. But gold is a rare precious metal with real-world benefits and strong desirability.

‘It is hard to put a value on Bitcoin. Can you say that a piece of digital code is something that is desirable? The answer is probably not.’

HUGHES points out that Bitcoin is also a long way from being classed as an alternative to cash. The City watchdog, the Financial Conduct Authority, does not regulate the trading of Bitcoin – which means the market has attracted criminals. The cryptocurrency has been used by money-launderers and criminals wanting to be paid in a hard-totrace currency.

Yet despite these concerns, a number of retailers – including soap shop Lush, online game outfit Twitch and select Brewdog pubs and Starbucks coffee shops – accept Bitcoin as payment.

They do not expect customers to hand over a full Bitcoin for payments but just a tiny part of one. This is because Bitcoin can be traded in fractions that are as small as a ‘Satoshi’ – which is one hundred millionth of a Bitcoin and only worth about 0.0002p.

Simon Peters, analyst at cryptocurrency trading platform eToro, says: ‘ The goal of Bitcoin is to replace traditional currencies and become a globally accepted means of exchanging value.

‘The ability to move money about without a financial institution acting as middleman has big benefits, such as cutting out charges from banks and card providers.’

Peters disagrees with the idea that the recent boom in value heralds a major fall.

He says: ‘The growth that Bitcoin has seen does not bear the same characteristics as the rise three years ago. Private and corporate investors are increasingly holding Bitcoin for the long term.’

For most people, the best way to obtain Bitcoin is to buy through an online trader such as eToro, Coinbase, Kraken or Bitstamp.

It is possible to buy the cryptocurrency by using a debit or credit card – you may pay up to 4 per cent in commission.

In return, you are given ownership with a unique code that is proof you own Bitcoin.

The currency is stored in a ‘virtual wallet’ where Bitcoin can be viewed and traded on a computer. There is no physical money that can be held or put in a pocket.

This digital wallet is, in effect, a virtual bank account allowing trading in the Bitcoin.