The Treasury Select committee1 recently described BitCoin and other digital currencies as a “Wild West Industry” and called for the regulator to have greater oversight and influence. This latest reminder helps to underline the decision in July by Brown Shipley’s Investment Policy Committee that “Crypto-Assets” have no place in a well-managed, risk targeted investment portfolio.
Between July 2010 and the peak of the market last year (16 December 2017) the value of one BitCoin increased by 32 million per cent2. In cash that means £1 would be worth around £322,238. It has since fallen almost 70%.
The rise and fall of digital currencies has generated plenty of column inches already but given the continuing media buzz in this area we wanted to expand on our thinking and also demonstrate that we do not discount any ideas without serious consideration. For simplicity we will focus on BitCoin but almost all of the issues discussed below are shared (or more pronounced) with the ever growing menagerie of digital currency alternatives.
Is BitCoin an alternative to Real Money?
This is the most obvious route to credibility and was almost certainly the intention of the mysterious creator Satoshi Nakamoto who included the following quote from the Times in the very first block of the block chain (the so called genesis block) “03/Jan/2009 Chancellor on brink of second bailout for banks”3. A bailout funded by Central Bank money printing of course. The desire to have money that is free from central bank control continues to be the principal reason for Cryptocurrencies in the eyes of many evangelists. Unfortunately BitCoin fails on some of the fundamental properties required for a reliable currency. Perhaps most crucially it is not a particularly useful medium of exchange, as most of the world's retailers do not accept it as a form of payment. In fact Morgan Stanley estimated the number of companies adopting BitCoin payment is falling4.
So if BitCoin fails as a currency, should we consider it an asset? In theory anything anybody is willing to buy is an asset. Assuming there is no benefit to holding the asset, like some form of income (which there isn’t), this is simply a judgement on whether you will be able to store your asset (usually at a cost) and ultimately sell it to somebody else in the future. This dynamic has drawn comparisons with commodities, particularly Gold, which exhibits this type of market. Here we encounter another series of problems:
What about the technology itself? Well that is a different story. The distributed ledger system that Blockchain has pioneered offers a whole range of potential uses, not least in the asset management industry. Indeed many major global businesses are already experimenting with this technology.
At Brown Shipley we are aware of the potential these innovations may present but we just believe we can capture it through our existing research processes, whether that be via specialist Technology funds who are on the ground in the silicon valley, through private equity who provide the venture capital for exciting new projects or even via large cap equities who will benefit from the efficiencies and savings that this technology can provide. So while we acknowledge the exciting developments that the cryptocurrency bubble has generated the digital coins themselves are not the way to gain exposure. We will continue to monitor developments in this area but for the near term at least Cryptocurrencies will stay in the realm of the speculator.
Alex Brandreth
Deputy Chief Investment Officer
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