In 2008, Satoshi Nakamoto’s paper, Bitcoin: A Peer-to-Peer Electronic Cash System, outlined the details of a payment system that would allow individuals to send and receive payments without intermediary financial instruments. This was how Bitcoin was introduced to the world. Over the intervening seven years, Nakamoto’s idea has moved from the abstract realm of academic consideration into the real – albeit virtual – world of commercial exchange.
Now, after seven years of hype, hubris and hostility, it may finally be time to acknowledge that Bitcoin’s time has come. The crypto currency surged past the $500 mark in the first week of November and increasingly it appears to be achieving the global take up that its adherents once predicted for it.
Over 100,000 businesses are now trading in bitcoin, including names as familiar as Microsoft, Dell, Expedia and Amazon. Bitcoin, whatever else may be said about it – and there is a great deal being said, written and broadcast currently – has hit the mainstream. The EU recently recognised the validity of the currency and, albeit less politically resonant, such august publications as the Economist and the Financial Times have given over front page space to discussing what the former described as a machine for creating trust.
From an investment point of view, there have been questions from the very first about the viability – or otherwise – in using bitcoin as an investment vehicle. The one dominant feature of bitcoin’s value has been its tremendous volatility. Looking beyond short-term fluctuations is not easy, although it is notable that in the 36 months prior to June 2015 the trading value of Bitcoin had been falling steadily, dropping from an all-time high of around $600 in 2010 to below $250. Since that nadir, however, the crypto currency’s value has been moving back up again. Q2 figures showed an 8 per cent rise followed up by a further 5 per cent surge in Q3. Late in Q3 the price surged past the $500 mark. Clearly, there is scope to make substantial gains in such a dynamic environment. Inevitably there is also a very real risk of extended periods of dramatic price reduction.
Technological take off
If the history of digital technologies teaches us anything it is that the scope for a new technologies to take off at an exponential rate cannot be ignored. As data from Hiscox illustrates, in the 15 years since the turn of the century, the UK’s top 100 constituents of the nation’s digital economy have expanded their revenues from a modest £414m to £2.4bn. In the process, wireless technologies, cloud-based computing, contactless payments and the ‘technology of things’ have all to varying degrees become part of our day-to-day realities.
Bitcoin’s backers are banking on their digital currency charting the same journey. But in the shorter term, the traditional market realities that bitcoin was supposed to circumvent are playing their part. Much of the recent buoyancy concerning bitcoin’s recent surge has been put down to a movement by Chinese investors to dissociate their investments from the Chinese economy.
Whilst banks and other institutions are increasingly fuelling the take up of the bitcoin and its blockchain technology, the idea that bitcoin’s value is unconnected to other currency movements is simply unsustainable. From an investment perspective then, far from simplifying the marketplace bitcoin’s value reflects a densely interconnected network of financial markets as well as the mainstream take up of such an unfamiliar technology. For all the hype, bitcoin remains an investment opportunity that is not for the faint hearted.