Are fund investors ready to jump on board with the Bitcoin investment craze?
Bitcoin was launched in 2009 in the midst of the financial crisis, but the cryptocurrency had remained under the radar until its soaring prices caught public attention this year. Now the price of one Bitcoin is nearing $20,000. That represents an almost 20-fold increase since the start of 2017.
Classification for the cryptocurrency is up for debate. It draws comparisons with currencies and gold, but is also viewed as an emerging technology that has the potential to shake up the entire monetary system.
Early adopters of the cryptocurrency included tech types, but also money launderers and participants in online black markets. Now surging prices are attracting speculators, but it is also popular as a store of value in emerging market economies, like Zimbabwe and Venezuela, where hyperinflation has taken hold.
The Chicago Board Option Exchange’s launch of Bitcoin futures adds further fuel to the speculative bubble surrounding the cryptocurrency. Prices saw a 19 per cent surge in their first day, but have since eased, and the launch of futures on rival derivatives exchange CME saw much more muted trading. Bitcoin futures are among the early steps towards granting the cryptocurrency some legitimacy within financial services, but are fund investors ready to jump on board?
John Redwood, chief global strategist at Charles Stanley
The decision by the Chicago Board Option Exchange to offer a future based on Bitcoin has added more buyers to the current craze to own it. It is the first official recognition by the financial establishment of the popular presence of this cryptocurrency.
The price of Bitcoin has soared this year. There have also been times when it has fallen rapidly, punctuating its ascent. Investment advisers have been understandably reluctant to recommend it as an investment. Bitcoin has no intrinsic value. It is not like gold where there are alternative uses for the precious metal for jewellery and adornment, nor are there years of established trading to create some sense of what it should be worth.
Bitcoin is only worth something all the time there are people who believe in it and see it as an alternative money. We can all see that Bitcoin goes up because the amount of it in issue is small and new creations of Bitcoin are limited. All the time more people think it will become a widespread functioning alternative to money and buy into it, it can go up.
We also need to remember that there are other cryptocurrencies trying to rival it. There is no central bank and banking system standing behind it, no deposit guarantees, and no regulatory framework. Confidence is a precious commodity. If people lose confidence at any point in a cryptocurrency it can fall as rapidly as it rose. So far there are limited traders who will accept Bitcoin in payment. All the time the price remains so volatile it is not a good unit of account. Money needs both to be a widely used medium of exchange and a unit of account.
Tim Cockerill, investment director at Rowan Dartington
I ask myself, what is Bitcoin? A currency? Yet a currency is a means of exchange and needs to be stable, which is not something Bitcoin has been, and to be exchanged freely and easily for goods and services, which it can’t. Another function is to be a store of value; but everyone is interested in Bitcoin because it has increased rapidly in value, which is fine for speculators, but does not exactly represent a stable store of value.
Another feature of a currency is the ability to expand supply, but an attraction of Bitcoin is its limited supply. So what is it? The Emperor’s new clothes, I suspect. It has no intrinsic worth and should the speculators move onto something else what value would it have? The pundits agree, it’s a bubble which is absolutely going to burst; but it’s a bubble that keeps running so long as investors keep the faith.
Shake the faith and it collapses like a house of cards, but investors can run on faith for a long time. The opening up of a futures market in Bitcoin is the next chapter in the story, risk is being ramped up, new entrants will come along, but I fear the Emperor’s new clothes will just become grander.
For now, this cryptocurrency has more of the characteristics of a commodity, with limited supply and many people trying to mine it and clocking up significant electricity bills in the process. At best, I would say this is speculation but it is actually more like gambling where you must be prepared to lose all your money.
With the spectacular rise in price this year, maybe this is a bubble built on the greater fool theory and you do not want to be holding a parcel of data when the music stops. As part of our investment process, we are always wary of fads and fashions, which rarely fit into a prudent investment portfolio. Even if we wanted to take a position, the operational and administrative challenges would likely outweigh the opportunity. Needless to say, our client portfolios will be unlikely to be holding Bitcoin anytime soon.