Is Bitcoin really back?
Well, here’s a funny thing. As global stock markets suffered their first down month of the year in May and bond markets rallied strongly, amid an apparent dash for safety in the face of continued uncertainty of global trade, Brexit and fresh unrest in the Middle East, one asset class gathered fresh positive momentum – cryptocurrencies.
This adds another chapter to a remarkable story. To pick out the biggest cryptocurrency, Bitcoin, which is worth $150bn or 55% of the total crypto market capitalisation according to the website Coinmarketcap.com, it now trades at its highest level in over a year at just shy of $8,500.
This is a huge contrast to December 2018 when the cryptocurrency could apparently do nothing right as it crashed to $3,195, its lowest level in 17 months. That was also a big turnaround from December 2017 when Bitcoin could seemingly do not wrong as it reached $18,941, the latest in series of all-time highs.
Bitcoin’s renaissance means it has more than doubled in 2019 in dollar and sterling terms, to make it the best performing asset class of the year so far.
This now begs the question of whether Bitcoin, or cryptocurrencies more generally, can be an asset allocation option for investors within a diversified portfolio.
MONEY, MONEY, MONEY
It can be argued that cryptocurrencies are money, as they facilitate transactions over time and distance and represent a trusted medium (at least by some), just as cowrie shells, cows, metal, slips of paper and plastic cards have since time immemorial.
So long as someone believes in cryptocurrencies, they and their network have a value – and the more people in the network then the more value they may have.
Bitcoin has some unique issues relating to its design that could yet prevent mass adoption:
– The bitcoin mining process that is required as part of the computational process to create new Bitcoins and provide proof of work is inefficient and energy intensive.
– Bitcoin’s supply is limited to just 21m. There are already 16m in issue and it is estimated that all Bitcoin will have been mined by 2040.
– Bitcoin has a clumsy cost structure. Miners receive a bonus for solving the algorithm when they mine a coin and this is paid in Bitcoin as a tiny percentage of the face value.
– This was no big deal when Bitcoin first reached the $1 mark in 2011, two years into its existence, but became a big issue when Bitcoin crossed $10,000 in 2017. It made transactions costly, prohibitively so for micro-payments in coffee shops or supermarkets.
– Bitcoin is not a particularly efficient payment system. It is slower than Visa, which can handle around 1,700 transactions per second, against Bitcoin’s maximum of around seven.
Rival cryptocurrencies Ethereum and Ripple can manage around 15 and 1,500 respectively across their blockchains. This suggests that even if Bitcoin is not around for ever, blockchain will be as it facilitates financial transactions across many industries and both the public and private sector.
There are three other possible drawbacks to Bitcoin and cryptocurrencies more generally. They are still not universally accepted. Individuals cannot buy their weekly groceries or pay their tax with them.
They are subject to fraud (not that this necessarily distinguishes them from other forms of remote payment or investment). They have no intrinsic value (though the same can be said for gold or paper money) and they do not generate a yield or cash (which some gold miners do, for example).
Under such circumstances many investors may shy away or seek alternative portfolio diversifiers. But Bitcoin’s current resurgence is eye-catching and it may be that we are still in the early days of cryptocurrencies and blockchain-enabled payment systems – Bitcoin’s price in dollars does, for the moment, look an awful lot like the ‘Hype Cycle,’ as designed by consultant Gartner.
It may also be no coincidence that Bitcoin and cryptocurrencies found fresh support just as equities wobbled, bond markets rallied and central banks did a policy U-turn, leaving interest rates untouched or even cutting them, rather than raising them.
Bitcoin’s resurgence may reflect fears over the global economy and the prospect of lower rates for longer or even more monetary stimulus if things get really difficult, as central banks lose control, although gold’s failure to perform this year does not fit with such a narrative.