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Is Bitcoin a modern-day bearer bond…

Choosing bitcoins, businessman pressing touch screen button.

It has been tough for much to break through the constant barrage of news stories about covid, lockdown, the economy and US election.

But bitcoin has managed it on a couple of occasions.

Its rapid ascent in the last few months has been astonishing – but, as the saying goes, what goes up must come down.

In the space of a week (admittedly one that involved the swearing in of the US president), a single bitcoin was worth:

  • 14 January = $39,780 (€32,814)
  • 21 January = $32,923 (€27,161) [at 12pm CET]

That’s a drop of over 17% in a week.

Compare this with 21 January 2019, when the price was $8,708.79, according to data from Coindesk.

That’s a year-on-year increase of roughly 380%.

It is, therefore, unsurprising that bitcoin is one of the most polarising assets on the market; some tout it as the next gold, while others think it is a bubble set to burst.

Tax evaders and drug smugglers

For David Coombs, head of multi-asset investments at Rathbones, it is the modern-day equivalent of bearer bonds which is one of the reasons he considers bitcoin to be “uninvestable”.

In a blog post on 12 January, he wrote: “Bearer securities were not registered in the name of any investor and were, therefore, owned by the person in whose hands they happened to be.

“So, bearer bonds and shares were an excellent way of holding assets anonymously. It was also easy to transfer their ownership. Usually via a briefcase. They tended to be the currency of choice for vagabonds (pun intended) of all types, from tax evaders to drug smugglers.

“Bearer securities were effectively a non-regulated form of wealth and payments outside of the official monetary system. Sound familiar?”

Coombs was motivated to write the blog after learning that one of Rathbones’ competitors had taken a position in bitcoin through a relatively mainstream fund, he told Expert Investor.

With one of the big banks also talking up cryptocurrency, he thought “this was quite dangerous”.

“If you want to put £100 into it, go ahead. But for a mainstream fund to put investors’ money into something like this, personally, I think that’s a mistake.”

He adds: “It feels like potentially another Ponzi scheme where a lot of people could end up losing money they can’t afford.”

Key questions

Aside from their legitimacy, Coombs also takes issue with the lack of visibility around bitcoin; specifically, the person or persons known as Satoshi Nakamoto who developed it back in 2009 and hasn’t been heard of since 2011.

He likens Nakamoto to the Wizard of Oz: “a man with a huge aura of power but little physical substance”.

Coombs outlined five questions prospective investors should consider:

  • How do you mine bitcoin?
  • Who decides how many there are?
  • Why does it take such a huge amount of computer power to mind a bitcoin and is that a good use of energy?
  • Who sets the rules?
  • How do you verify the supply?

Aware that he may be accused of being “an out-of touch luddite boomer”, Coombs is unmoved. “This is uninvestable for me.”

Still in its infancy

Having only been developed in 2009, it is fair to say that bitcoin is very young and still evolving, albeit very quickly.

For Jason Guthrie, director of capital markets and digital assets, Europe at WisdomTree, the accelerating acceptance of cryptocurrency has put paid to suggestions that it is a bubble.

“If it was a flash in the pan, it probably would have petered out by now,” he tells Expert Investor.

Within the institutional investor space, Guthrie says there are some at the very bullish end and others who are incredibly sceptical of cryptocurrencies like bitcoin.

“Adoption is never universal across a given client segment. But I think the number of people moving from the sceptic camp into the investment camp is definitely increasing.”

When it comes to enquiries, Guthrie and his team get everything from investors ready to part with their capital to more tentative questions from people just trying to get their heads around the concept of cryptocurrencies.

“Even the most basic kind of information gathering is a good leading indication of adoption,” Guthrie says. “If something is of zero interest, you don’t look into it. And we are seeing more clients asking those questions.”

That includes some of the more traditional and historically slower players in the market; such as insurance companies and pension providers, he adds.

Of the $70bn AUM held by WisdomTree, around $200m is invested in its bitcoin strategy.

“It’s still a very, very small proportion but it is growing quickly, although I don’t expect it to be a double-digit percentage of assets anytime soon.”

Guthrie says it is “absolutely right for people to be sceptical of something they don’t understand”; but pointed out that similar knowledge gaps exist in the mainstream market that people don’t really question.

“We come from a system where we’re used to being able to point to someone and say that they run that, so it’s going to be okay. That’s the basis on which most people are comfortable with, for example, the banking system.

“But if I asked someone to explain to me the function of a central bank or how the M1 money supply works, I would say that the majority wouldn’t be able to answer.”

It’s a digital world

Whereas Rathbones’ Coombs likened bitcoin to bearer bonds, Guthrie sees it more akin to the internet.

“If we take a step back, I think it feels an awful lot like being in 1991 and talking about the internet. There was a lot of criticism and people telling you why it won’t work.

“And not everyone is going to be able to answer exactly what the vision is or how everything will net out or how humans, en masse, will respond over a 20-year period.

“Nobody in 1991 could have predicted that we would have Google and Amazon as they exist today.”

Guthrie adds: “But what you could say at that time was that the internet had this huge potential for reorganising how we share information.

“I think digital assets are going to do to financial services what the internet did to information sharing. And not being able to predict the exact course of action doesn’t make that potential not exist.”

Unconvinced

The internet comparison is one that Coombs has heard before and it is not an argument that sways him.

“A lot of people lost money on the internet,” he says, pointing to the dot.com bubble as one example.

But while the internet, as a means of communication, has a multitude of uses; bitcoin has only one, Coombs says.

“A store of value.”

But that’s not to say that he dismisses the concept of digital currencies completely.

Coombs just believes that we will end up with virtual versions of the euro, the pound and the dollar, among others.

“We will end up with a digital currency, but I’m afraid it will be regulated by the Federal Reserve or the Bank of England.

“It won’t be regulated by the Financial Conduct Authority.”

Kirsten Hastings

Kirsten is international editor of Expert Investor and International Adviser, covering global news stories about the financial services industry. She joined Last Word Media in October...