Is Bitcoin really back?

Image of Bitcoin symbol at the end of a tunnel

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 $150 billion, or 55% of the total crypto market capitalisation, according to the website Coinmarketcap.com — now trades at its highest level in over a year at just shy of $8,500.

This is a huge contrast to December 2018 then the cryptocurrency could apparently do nothing right as it crashed to $3,195, its lowest level in 17 months. That was in itself a big turnaround from December 2017 when Bitcoin could seemingly do not wrong as it reached $18,941, the last in a series of all-time highs.

Bitcoin rebounded in 2019

Source: www.coindesk.com, Refinitiv data

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.

“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.”


Bitcoin has left other asset classes trailing in its wake in 2019

Source: Refinitiv data. Global equities based on MSCI World index. Global Sovereign Bonds and Global Corporate Bonds based on Barclays Aggregate indices. Emerging Market equities based on MSCI Emerging Markets index.

This now begs the question of whether Bitcoin, or cryptocurrencies more generally, can be an asset allocation option for advisers and clients within a diversified portfolio.

A quick explainer

In essence, Bitcoin (or any cryptocurrency) is a digital asset and payments system, a virtual currency where intermediaries play a very limited role and central banks and governments none at all.

It is encrypted, and the creation or transfer of every Bitcoin is kept on a ledger and archived for maximum transparency as to supply (although the encryption element ensures anonymity for users). This is all made possible by so-called ‘blockchain’ technology, a database that maintains an ever-growing list of records, called blocks. Each block is linked to its predecessor and bears a time stamp.

To borrow an analogy from Mr Trevor Neil of Beta Group, who spoke eloquently on the subject of cryptocurrencies at a recent CISI event in Portsmouth, if cryptocurrencies represent cars, Bitcoin is one single model (albeit the best-known one) and blockchain technology is the engine that makes all of them tick.

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 there in the network, then the more value they may have.

However, as Mr Neil points out, Bitcoin in particular has some unique issues relating to its design (which all stem back to its as-yet-unidentified creator, Satoshi Nakamoto) 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 21 million. There are already 16 million in issue and it is estimated that all Bitcoin will have been mined by 2040. (True believers will counter that this is a good thing after a decade of Quantitative Easing and that it is the finite nature of supply, relative to central-bank created currency, that means Bitcoin is a potential store of value).

  • 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 it existence, but became a big issue when Bitcoin crossed $10,000 in 2017. It made transactions costly, prohibitively so for micropayments 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 7, while the 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 forever, blockchains will be as they facilitate 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. Clients cannot buy their weekly groceries or pay their taxes with them.

  • They are subject to fraud (not that this necessarily distinguishes them from other forms or 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).

“It may be that we are still in the early days of cryptocurrencies and blockchain-enabled payment systems.”


Under such circumstances many clients and advisers 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 consultants Gartner.

“Bitcoin’s price in dollars does, for the moment, look an awful lot like the ‘Hype Cycle,’ as designed by consultants Gartner.”


Are cryptocurrencies emerging from Gartner’s ‘trough of disappointment’?

Source: Gartner Group

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 as they are 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 Quantitative Easing 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.

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.

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