17 December 2020
A Bitcoin Christmas?
Still not convinced.
By Frank O’Nomics
It’s three years since I wrote in these columns about the folly of Bitcoin. At the time it was trading at around $14,000, yet within a year it languished closer to $4,000. Pretty clever – until we look at the price action this year, with the crypto currency now trading above $19,000. Proponents tell me that this year highlights one of the key benefits of Bitcoin – that it is not correlated to other asset classes. Was I wrong? And, if so, what should I do now?
When I recently asked someone in the crypto currency industry where he saw Bitcoin ultimately settling, he barely paused before saying: “£1 million”. Even if he is remotely on the right track, and Bitcoin is up 150% this year, I clearly need to re-test my view. So has something fundamentally changed? There have been two major positive developments. The first is that Bitcoin has seen a greater acceptance in being used to make purchases. Perhaps the biggest change was that PayPal has said that its customers, and there are 350 million of them, will now be able to use their accounts to trade Bitcoin and use it to make purchases. This is a major step towards it becoming a generally accepted currency.
The other big development has been that investment in Bitcoin has extended beyond just private speculators, with some serious institutions getting involved. Previously, in times of great uncertainty, investors ploughed money into real assets or gold. That has not changed markedly (gold has risen 25% this year) but Bitcoin has now been included in that range of assets by some. Part of the reason has been that those other assets are generally valued in dollars, and with the Fed (and other major central banks) printing money with great abandon, the trust in fiat currency has been eroded. Even Ray Dalio, the man behind the world’s largest hedge fund, Bridgewater, has questioned whether he might be “missing something” having previously regarded the rise of Bitcoin as “a bubble”. The hedge fund guru Paul Tudor Jones goes further, comparing buying Bitcoin to “investing in Google early”. So far, the extent to which institutions have become involved has been exceptionally small – all it would take would be a modest shift into the asset, which has a finite supply, for the value to explode to the levels my crypto friend suggested.
Here it is time to pause and assess whether these changes really will amount to anything. There remains a question of regulation. The Financial Conduct Authority is banning the sale and marketing of some crypto currency products to retail customers from 6 January, and some large platforms such as Hargreaves Lansdown stopped offering any some time ago. Nevertheless it will still be possible to invest in the currency itself.
For many investors, at current levels, that may mean only being able to hold a bit-of-a-Bitcoin, and even those who can make bigger investments should ask deeper questions. The biggest one is: “Does it do what it says on the tin?” The whole point of crypto currencies is that they are not subject to manipulation by governments trying to inflate their way out of a debt problem. Finding something that can sustain its real value in turbulent times is very useful. However, if that asset is very volatile itself, the whole basis of its existence is called into question. The daily swings in Bitcoin can be alarming and if you were, say, looking to use that money to buy a house, the house you could afford today could be very much smaller tomorrow. Bitcoin should be the province of the risk-averse not, as is currently the case, a vehicle for outright speculators. Since the development of the global inflation-linked bond market, where investors are protected against inflation, the need for other defensive assets, such as gold, has been markedly reduced, and the volatility experience is a fraction of that seen in Bitcoin.
Which brings us back to the other supposed benefit – the one that has got institutional investors so interested – that Bitcoin is not correlated with other assets and hence useful for portfolio diversification. Sceptics will argue, with some justification, that there is insufficient evidence to support this view; while investors in FTSE stocks have had a tough time, there are a great many US growth stocks that have had a very good year and have a discernible (if stretched) asset value.
Will Bitcoin go a lot higher? There is every probability that it will. Is the move still a bubble? Again the answer seems to be yes. As I suggested three years ago, Bitcoin is a great example of the use of Blockchain technology, which has a myriad of very valid and possibly transformation uses. However, it does not, in itself, appear to be a game-changer. By all means buy some Bitcoin, but be prepared for a bumpy ride – and don’t ever say that I told you to.
