Is Bitcoin back?

At a time when a FTSE 100 member’s shareholder list looks flaky and shares in a fake meat company are sizzling again in the US, it may come as no surprise to some advisers and clients that an alternative currency (or a fake one, depending on your viewpoint) seems to be coming back into vogue. Bitcoin is once more nearing the $10,000 mark.

Some may view this as another reason to view markets as worryingly frothy, as a plentiful supply of liquidity from central banks keeps them bubbling along. Others will argue the cryptocurrency’s return to favour affirms their view that central banks’ continued provision of cheap cash is only serving to debase existing currencies and open the way to a major reset.

Bitcoin first reached $10,000 in December 2017, briefly recapturing that level in summer 2019, and the cryptocurrency is now trying again, as it trades near $9,800. That is still a long way below its all-time high of $18,941 from late 2017 but it represents a stunning recovery from the December 2018 low of $3,196.

Bitcoin is enjoying another good run

Source: Refinitiv data

Show me the money

According to the website, the total value of Bitcoins in circulation is $178 billion.

“Bitcoin’s $178 billion market valuation would make it the biggest stock in the FTSE 100, the second-largest name in Europe’s Eurofirst 100 and rank it thirty-second in America’s S&P 500 index.”

That represents almost two thirds of total crypto market valuations and means Bitcoin is valued more highly than Royal Dutch Shell, the largest company in the FTSE 100. It also means Bitcoin is bigger than all but luxury goods giant LVMH in Europe’s Eurofirst 100 index and that it would rank thirty-second by market cap within America’s S&P 500 equity benchmark for good measure.

If Bitcoin keeps going, this could well rekindle the debates as to whether Bitcoin is ‘money’. That in turn fuels discussion over whether it is worthy of consideration as investment as part of a balanced portfolio.

The case for considering Bitcoin to be ‘money’ is that cryptocurrencies 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 networks have a value – and the more people there are in the network, then the more value they may have.

Sceptics have three specific counterarguments to this.

  • First, the Bitcoin mining process is inefficient and energy intensive.

  • Second, Bitcoin miners’ and transaction fees can make using the cryptocurrency inconvenient or even expensive, especially for micropayments.

  • Finally, Bitcoin is not a particularly efficient payment system. It can handle a maximum of around seven transactions per second. Visa deals with around 1,700.

  • “Fans will point to how Bitcoin supply is limited to 21 million, a stark contrast to central-bank-controlled fiat currency and an era of […] Quantitative Easing and spiralling Government […] budget deficits.”

    When it comes to seeing Bitcoin as an investment, believers will point to the crypto’s resurgent price. Fans will also point to how Bitcoin supply is limited to 21 million, a stark contrast to central-bank-controlled fiat currency and an era of record-low interest rates, Quantitative Easing and spiralling Government spending plans and budget deficits – and that is even before we get to Modern Monetary Theory. In sum, Bitcoin is viewed by supporters as a store of wealth and protection against central bank and governmental monetary profligacy.

    Value versus price

    So-called ‘no-coiners’ will dismiss such arguments on three counts.

  • First, they say, there is a theoretical limit to the supply of Bitcoins but the proliferation of initial coin offerings (ICO) suggests that cryptocurrencies are no better at managing supply and providing sound money than the central banks. The coinmarket.cap website lists over 2,300 different cryptocurrencies.

  • Second, the Mt. Gox disaster, 2017’s enforced shutdown of the Silk Road website and 2019’s Bulgarian OneCoin scandal show that cryptos are subject to fraud (not that this admittedly unduly distinguishes them from other forms or remote payment or investment).

  • “Non-believers will assert that cryptos’ biggest alleged strength – they are not authorised, regulated or subject to ‘official’ control – is their biggest weakness, in the view that they have limited use or value if you cannot pay tax or buy groceries with them.”

  • Finally, non-believers will assert that cryptos’ biggest alleged strength – they are not authorised, regulated or subject to ‘official’ control – is their biggest weakness. Unless Bitcoins can be used to buy groceries or pay taxes, they have limited use and thus value, no matter how many you have, goes the argument, while there is always the risk that the authorities do get involved, as seen with US President Franklin D. Roosevelt’s Executive Order 6102 which criminalised the possession of gold in 1993 and Facebook’s Libra payments project which has quickly encountered substantial central bank opposition.

  • As banking dynasty founder Mayer Amschel Rothschild once said, “Permit me to issue and control the money of a nation and I care not who makes its laws”. It seems unlikely that central banks will cede control, although Bitcoin believers will argue they could lose it.

    It may be no coincidence that Bitcoin and cryptocurrencies are finding fresh support in the wake of 2019’s central bank policy U-turn which saw a shift to cutting interest rates rather than raising them and even fresh US Federal Reserve intervention in the US interbank funding markets. Gold has rallied, too, perhaps for the same reasons, although looking at the recent share price performance of meat-alternative provider Beyond Meat and next-generation carmaker Tesla, older heads may just be tempted to dismiss Bitcoin’s renaissance in this context as the latest in a long line of bubbles fuelled by central-bank-provided liquidity.

    Bitcoin is not the only alternative investment to head back into orbit in 2020, with both Beyond Meat…

    Source: Refinitiv data

    … and automotive revolutionary Tesla heavily favoured by investors

    Source: Refinitiv data

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.