Bitcoin boom: the pros and cons of putting money into the cryptocurrency
Bitcoin’s recent surge beyond $50,000 for the first time has reignited intense discussion about the best-known cryptocurrency.
Its meteoric rise in recent months has lured in thousands of Millennial investors with dreams of fast profits thanks to the swathe of mobile apps, such as Coinbase, that make buying bitcoin simple.
But the powerful forces of emotion and psychology toy with older, more experienced investors too and many have felt the grip of FOMO, or the fear of missing out.
The number of people asking if they should put money into bitcoin grows by the day, so Shares has put together the pros and cons in this article.
Industry research shows that 54% of investors polled are not being put off from buying bitcoin despite intensely volatile markets. ‘Historically, the run up to March is a very volatile period in cryptocurrency markets,’ says Jolyon Layard-Horsfall, chief executive of cryptocurrency predictions platform TotemFI.
‘Last March bitcoin fell by 28.9%, and in March 2018 by 39.9%, but in all instances the price quickly rebounded, and March corrections are often followed by long bull runs and, frequently, by new all-time-highs,’ he adds.
As investors have piled in, it has lit a fire under some bitcoin stocks. Bitcoin miner Argo Blockchain (ARB) has been one of the most popular shares traded across UK investment platforms so far this year, sending its stock soaring from 33p to a high of 284p on 17 February.
There is also the Invesco Elwood Global Blockchain UCITS ETF (BCHS). It doesn’t invest in bitcoin directly but has stakes in companies that use or are developing the blockchain technology that underpins bitcoin.
The ETF only launched in 2019 so performance history is limited but it did grow by more than 131% in the year to 5 March 2021, according to Morningstar data.
NUTS AND BOLTS OF BITCOIN
Bitcoin is a digital currency and a protocol that enables instant worldwide payment transactions with low or zero processing fees.
Unlike typical currencies, bitcoin operates with no central bank or authority. Instead, managing transactions and issuing bitcoins is carried out collectively by the network of users. The software is a community-driven, free, open-source project. Basically, it uses cryptography to control its creation and transactions.
About 900 bitcoins are mined every day, according to buybitcoinsworldwide.com, with more than 88% of the finite total that will ever be created already in issue. That suggests the last bitcoin will be mined by 2030.
Mining was a term deliberately chosen because of the way the creation of bitcoins is meant to mimic the act of mining gold, with a finite supply and diminishing returns the longer you mine.
HOW DO YOU INVEST IN BITCOIN?
Investors can buy bitcoin directly through cryptocurrency exchanges, such as Coinbase, Binance and Kraken, the three largest. There are also a growing number of bitcoin apps.
With bitcoin now trading at more than 10 times the $4,850 levels of March 2020, it has made the cryptocurrency hard to ignore even for those in the highest spheres of finance, technology and government.
Many have strong opinions on the digital currency and retail investors will find an abundance of bitcoin evangelists on the one hand, and cryptocurrency sceptics on the other.
Nobel prize-winning economics professor Robert Shiller (the man behind the cyclically adjusted price to earnings ratio) has previously called bitcoin an ‘epidemic of enthusiasm’ and a ‘speculative bubble’.
American economist Nouriel Roubini (aka Dr Doom) claimed that ‘most bitcoin investors are retail suckers who are clueless and financially illiterate’, according to Bloomberg.
WHICH BIG NAMES ARE TAKING BITCOIN MORE SERIOUSLY?
The conversation seems to have moved forward with many large institutions now taking bitcoin far more seriously.
Tesla says it would be willing to accept payment for its cars in bitcoin and has purchased a $1.5 billion slug of the cryptocurrency.
Financial firms including Mastercard, PayPal and Bank of New York Mellon are shifting towards allowing transactions in bitcoin or hold it on clients’ behalf, while Morgan Stanley CEO James Gorman and former Goldman Sachs boss Lloyd Blankfein have thrown their considerable clout behind bitcoin.
‘Not so long ago, some experts argued that personal computers would never be adopted and that tablets would only be used as expensive coffee trays,’ said Christine Lagarde, president of the European Central Bank, in 2017 when she was managing director of the IMF. ‘I think it may not be wise to dismiss virtual currencies,’ she added.
‘The list of institutional investors and corporations allocating in bitcoin is growing rapidly and includes names such as business intelligence firm MicroStrategy, and high-profile asset managers Paul Tudor Jones, Bill Miller, Ruffer and Guggenheim Partners,’ says Anatoly Crachilov, CEO of asset manager Nickel Digital.
UK LACKING BITCOIN INVESTMENT CHOICES
There seems to be no shortage of UK retail investors interested in bitcoin but they are currently starved of opportunity through investment products, particularly since the ban on derivatives and exchange-traded notes linked to cryptocurrencies by the UK’s financial regulator, the Financial Conduct Authority, which came into effect in January. An exchange-traded note is a type of tracker fund.
That’s not the case in the US, where bitcoin-based exchange-traded funds are rapidly emerging, even if they are not accessible from the UK.
The CME, a US derivatives exchange, offers bitcoin futures, which could smooth the way for a more liquid market in the future, and possibly expand the options for UK investors in time.
Three stocks for bitcoin exposure (and one coming soon)
Argo Blockchain (ARB) 260p
Argo Blockchain verifies blockchain distributed ledger transactions. It earns bitcoin for its transaction verification work, according to its website, a power-hungry business needing vast data processing capacity because of the complex calculations required.
Online Blockchain (OBC:AIM) 68p
Online Blockchain calls itself an incubator of cryptocurrency start-ups, projects and solutions, the company currently has nine interests in its portfolio including a stake in PlusOne Coin, which says it helps monitise social media platforms.
Mode Global (MODE) 53.2p
Recently listed Mode Global operates a bitcoin banking app. It saw trading volumes surge 1,500% in December and data on its customer base shows the male, under-30s demographic that is illustrative of wider bitcoin investment: 79% are male and 64% are 30 or under. It also offers a bitcoin jar product which offers the prospect of generating interest.
Coinbase to float on the US stock market
Coinbase, one of the world’s largest cryptocurrency exchanges, is closing in on a stock market listing in the US with a $100 billion valuation mooted.
The company hopes to list its shares on Nasdaq and will trade under the ticker COIN. UK investors should be able to buy and sell the stock via most mainstream investment platforms.
IS BITCOIN THE RESERVE CURRENCY OF THE FUTURE?
Some people believe longer-term investment is driving the latest surge in bitcoin popularity, yet others believe get rich quick profit speculation is the real culprit.
Bulls argue that bitcoin demand reflects rising fears of fiat currency debasement, due to central banks pumping liquidity into markets.
Bitcoin is increasingly seen as a place to put cash reserves and expectations for considerable inflows on this basis are a crucial part of the long-term investment case in favour of bitcoin.
‘Gold and index-linked bonds have per-formed well in recent years, but have completely decoupled from bitcoin,’ argues the team at capital preservation fund Capital Gearing Trust (CGT).
They accept the possibility that institutional flows out of gold and into bitcoin is a plausible explanation for the current negative correlation between gold and bitcoin.
‘A small shift in allocation, and associated disequilibrium, should result in high prices and high vol-atility,’ says Capital Gearing. However, that would put pressure on bitcoin’s valuation as this investment tactic flushes through markets.
‘The future price of bitcoin could be much lower once these flows are complete and equilibrium re-established.’
Can I put bitcoin in my ISA or SIPP?
No, you cannot. It is not possible to hold bitcoin directly in an ISA while the Financial Conduct Authority has banned the sale of exchange-traded products linked to bitcoin to retail investors.
ISAs and SIPPs are designed for long-term investing and the UK’s finance watchdog still sees bitcoin as a speculative short-term asset. That makes it unlikely that bitcoin investing will be given the tax advantages of ISA and SIPP wrappers anytime soon.
While investors cannot invest in bitcoin or any cryptocurrencies directly through mainstream investment platforms, there are stocks listed on the UK and overseas markets which can give investors exposure, such as Argo Blockchain (ARB) in the UK, and MicroStrategy and CME in the US.
OTHER PARTS OF THE BULL CASE
Beyond the store of value argument, slashing the cost and complexity of moving money around the world and trading in multiple currencies are other potential advantages of bitcoin.
‘For multinational businesses it is a huge nightmare,’ says TotemFI’s Layard-Horsfall. Stripping out the need for multiple currency reporting, accounting and complex derivatives for hedging would be an advantage for many companies.
There could also be advantages for the world’s millions without access to banking, where bitcoin can be sent direct to an individual’s phone without the need for accounts.
The TotemFI boss predicts that bitcoin will be worth $300,000 by the end of 2021, and sees the cryptocurrency soaring beyond half a million dollars in the next few years.
THE ARGUMENTS AGAINST BITCOIN
In bitcoin’s short life it has experienced three valuation plunges of 80% or more, according to Capital Gearing, which is why it remains reluctant to invest in any asset which has a high prob-ability of large drawdowns. ‘We are especially reluctant to invest in an asset where we would be incapable of explaining such a fall.’
Consumer research conducted by Findoutnow in February on behalf of investment platform AJ Bell suggests that a generation of investors have ‘leap-frogged traditional savings and investments and jumped straight into the deep end by buying cryptocurrencies’, according to Laith Khalaf, financial analyst at AJ Bell.
‘Not only are many consumers buying cryptocurrencies without having an ISA, pension or savings account in place, there also seems to be a significant misunderstanding of the risks involved,’ he adds.
The research showed that 30% of cryptocurrency investors are not willing to lose any of the money they’ve invested, which suggests a real lack of understanding in the downside risks involved.
‘If you’re the world’s richest man, investing $1.5 billion of the assets of your electric car company (Tesla) into bitcoin is one thing. But UK consumers seem to be playing Russian roulette with their money on the cryptocurrency markets,’ Khalaf adds.
Security of bitcoin also remains an issue after high profile thefts by hackers. This is a key area where bitcoin needs to build trust with potential users. It’s a wider digital security problem rather than a bitcoin-specific issue that includes online banking fraud, identity theft, online scams and stolen credit card details.
DON’T BET YOUR HOUSE ON BITCOIN
As with many things, the truth behind the bitcoin opportunity probably lurks somewhere between the extremes of opinion and Shares would suggest that investors apply a healthy measure of scepticism before plunging in.
Even then, we would not recommend allocating more than 5% of your assets to bitcoin and cryptocurrencies.
The UK’s financial watchdog the Financial Conduct Authority earlier this year warned retail investors over the high risk of investing in cryptocurrencies like bitcoin, telling them to be prepared to ‘lose all their money’.
‘When there are no fundamental characteristics like assets, cash flows, recurring demand, etc, to base price estimates around, or a management team to discuss the way forward with, it’s easy to lose confidence during times of crisis, and be shaken out of a position,’ says Andrew Hardy, director of investment at Momentum Global Investment Management.
‘That’s something investors need to consider given the huge volatility that is likely to persist in the bitcoin price.’