Bitcoin – instant riches?


Bitcoin is in the news. If you had bought some of this crypto currency at outset you could now cash in a very large profit. Some think that if you bought it at today’s elevated level you could still be in time to make a large profit going forward. It is not something Charles Stanley has bought for clients and not something we have recommended.

Let me begin with suitable humility. I have no idea whether Bitcoin will be considerably more valuable in a year’s time, or a lot lower than today’s value with many more critics. That’s one of the reasons why Charles Stanley has not recommended it. It is not susceptible to the normal analyses of value which we can apply to shares or bonds or even to established currencies. The likelihood of being wrong about Bitcoin is considerably greater, amplified by its much greater price volatility. Whilst it has risen massively since the first creation in 2009, it has also suffered some huge falls on the way up. Whilst it is very likely the dollar will be around in a hundred years, the long term future of Bitcoin is less clear.

So why is it so difficult to analyse, and why can’t normal investment houses add it to their list of assets and give informed views about it? The main reason is that its value entirely depends on fashion and belief. All the time an increasing number of people and companies want to own it and use, it is likely to go up in value. It is designed around artificial scarcity, which could sustain ever higher prices if it continues to attract more support from significant numbers of people around the world. True speculators who can afford to lose their stake may well make a lot by buying it. The danger is that competitor currencies are created which attract people more, or that more Regulators around the world decide as the Chinese already have that it should be banned. That could lead people to want to dump their Bitcoins, and cut off the supply of new purchasers. If something major does go wrong it will difficult to sell.

So far the long term trend has been up. People have been attracted to it because its original design limits the total number of bitcoins that can ever be created to just 21 million. Bitcoins are added at the rate of 12.5 new ones every ten minutes under a system which rewards participants who use the Bitcoin system through a contest. This has usually proved to be well below the rate of creation needed to keep pace with demand for Bitcoin, leading to large price rises. Were Bitcoin to become a common alternative currency to the main world established currencies, the price of Bitcoin could go up greatly, assuming they stick to their rule of only creating 21 million.

Bitcoin has its critics. Some claim it is used by criminals. Some banks refuse to deal with Bitcoin for fear of association with the criticisms of it or the regulatory issues it raises. Some object to the very idea that private individuals can create their own money and pocket the proceeds of being able to do so. The UK’s FCA has recently issued a warning about Initial Coin offerings or ICOs in general that applies to token or digital new money systems. It has said “ICOs are very high risk speculative investments… you should be conscious of the risks involved and prepared to lose your entire stake”.

The whole Bitcoin system depends on maintenance of the rules and the blockchain ledger that records all bitcoin transactions. If an individual buys bitcoin they or their agent needs to hold two keys or passwords to retain access to their bitcoin record and to be able to spend it. There is scope to lose your keys, and danger from interception of them. The system is not subject to the same regulatory controls and deposit guarantees that are available for traditional currencies deposited in regulated banks.

New money or token fans argue that the World’s Central banks have not done a great job creating and managing the regular currencies of the world. They have allowed or encouraged substantial inflation by issuing more than the market can easily absorb at any given time, reducing the real value of your dollars or pounds. They see Bitcoin being more widely adopted as a store of value and as a means of exchange. People can add transactions services onto the bitcoin technology, and more businesses are now accepting bitcoin in payment. Some see it as a kind of new gold. Gold after all has limited industrial utility, but does allow people to make valuable coins or simply hold it as a store of value in gold bar form. Others think there is a big difference between gold as an alternative currency and these crypto currencies. Gold has the advantage of centuries of acceptance as a store of value, and a regulated system for holding and exchanging it.


The above article was first published by Charles Stanley on 15th September 2017