Bitcoin – peak of a phenomenon or time to invest?
WE'LL start this week's column with a pub quiz. Who is Satoshi Nakamoto? The answer is, he's the inventor of bitcoin, the first crypto currency, the fascinating subject of most financial chatter in recent weeks.
When the mysterious Mr Nakamoto created the first 50 coins of digital currency in 2013, he had decided it was time for a new decentralised currency, free from the control of governments and central banks. He remains anonymous and when the concept began to gain attention, it was seen as something of a curiosity.
Early adopters and observers of bitcoin have seen it surge from $1000 in 2013 to a speculative spike of almost $20,000 in December 2017.
It quickly plummeted back to around half of this value, but from sitting at around $10,500 in October/November, Bitcoin sprang to life again at the end of the year, reaching quite remarkable peaks of over $36,000 in the first week in January. Since then, its price has been on a rollercoaster and many both within and outside the financial world have looked on, intrigued.
It is thought some of its year end gains have been fuelled by rising interest from professional investors, who may be starting to look at crypto currency as a long-term investment. Now the early adopter enthusiasts and currency speculators are being joined by a host of traditional investors and even some funds.
Most mainstream financial institutions, however, do not offer crypto currency trading services as they do for traditional currencies, making both storing and trading complex. Its use in transactions thus far seems relatively limited and market intelligence indicates that it does not change hands very regularly, perhaps demonstrating a faith by its owners that it may be a promising long-term asset worth holding on to.
Many investors remain deeply sceptical of the crypto currency. With such vast fluctuations in price as have been seen even in the past fortnight, it's not hard to see why it may look unreliable as a store of value, versus its more sedate and stable rival, gold. (Optimistic crypto fans, on the other hand, regard the alternative currency as “digital gold”.)
Of course a surge in value, such as that seen in early January 2020, makes the wider market sit up, take notice and ponder whether they have missed the crypto boat, or if it's a boat worth hopping aboard. PayPal launched digital coin trading in October and Coinbase, the major US crypto currency exchange, is planning to go public this year. Other digital currencies such as Ethereum and Litecoin have also recorded sharp increases.
So with all this in mind, the question investors will be asking professional wealth and investment managers is: should we get in? In general terms, for us to consider including any asset in client portfolios, it should have a positive expected return over the long term, and act as a diversifier in a mixed portfolio.
Bitcoin possibly satisfies both criteria, but there are several caveats. First, there are few (if any) credible ways to determine bitcoin's expected return: many often rely on someone else to purchase at a higher price later on. This makes it susceptible to sharp swings in sentiment. During the height of its popularity in 2017, bitcoin enjoyed a swooning 1800 per cent surge, shortly followed by a massive 80 per cent collapse in price. Also, the outsized volatility of bitcoin returns dwarf even those of highly risky assets like emerging market equities and junk credit, making significant holdings of bitcoin unfeasible for investors, save for the extremely risk tolerant.
Right now, bitcoin is in the eye of a perfect media storm – not only does its dramatic rise in value make it alluring, it is mysterious, complex to understand, hard to pin down and originally rooted in “the dark web”. It's a fascinating concept and recent Google Trends data shows that online searches for bitcoin are now at levels just below those at its previous speculative bubble in 2017. Whether that means people want to buy it or just to understand it, remains to be seen.
Past performance is not indicative of future performance and given its outsized volatility and uncertain future, whilst fascinating to observe, our team don't believe Bitcoin is an investment worth holding in any significant amounts.
:: Claire McCombe is a wealth manager with Barclays Wealth & Investments Management in Belfast.