By Ben Kumar, Investment Manager
When something is being touted as a new asset class, multi-asset managers should pay attention, and there is a real buzz going on about cryptocurrencies at the moment. Since April 2017, Google searches for Bitcoin have tripled, an increase bettered only by the price of Bitcoin, which has quintupled (or possibly more by the time this is published). A large number of those searches are some variant of “what is Bitcoin” – which chimes exactly with some of the questions we hear from clients.
While 7IM has no allocation to Bitcoin, we’ll try to outline the basics of Bitcoin in this article (which can also apply to cryptocurrencies in general) and why we think people are finding it all so exciting1. Please note though that this is aimed at giving you some information rather than providing you with a recommendation to buy.
What is Bitcoin?
Bitcoin is a digital currency. To be honest, most currencies are primarily digital these days, so this isn’t a massive selling point on its own. In the UK, most transactions don’t involve physical cash now; don’t just think about paying for things in shops (where only 42% of transactions now involve cash), but also consider how we make payments of salaries, rent, mortgages etc. Digital money is already here. Bitcoin is faster than moving conventional currencies around though, as it was meant to be digital from the beginning. No more settlement periods, or two to three business day wait times.
Bitcoin is a decentralised currency. This means that unlike the Pound or the US Dollar or the Euro, there is no government/central bank that has responsibility for controlling the amount of currency in circulation. Instead, it is all under the jurisdiction of a computer code that cannot be overwritten. This lack of central control is a big selling point for many people.
Bitcoin is a finite currency. This is related to the point above – taking central banks out of the picture. There will only ever be 21 million Bitcoins in existence, something that is hardwired into the code. You will never be able to just create money out of thin air, as has been happening with Quantitative Easing since the Global Financial Crisis. Again, this has been a factor that many Bitcoin advocates are on board with.
Bitcoin is a fully transparent, yet fully anonymous currency. That seems like a bit of a paradox. The transparency part comes from everyone being able to see where any Bitcoin is, and when it moves. So everyone will know instantly if a Bitcoin moves from person A to person B. The anonymity comes from having no idea who person A or B is – their identity is a randomly generated string of computer nonsense. So, you can have confidence in the system as a whole, without knowing which individuals are actually participating. You’ve guessed it – this anonymity is another big selling point.
Why is it so exciting?
There are hundreds of reasons that Bitcoin is potentially exciting or revolutionary, but here’s how we think it breaks down.
Really, it comes down to taking back control in a high tech age. Governments (for which you can also read central banks) are less trusted than they’ve ever been, at a time when individuals have more ability than ever to express themselves. People are used to controlling their own reality through technology. We no longer have daily newspapers, TV schedules and bus timetables – we design our newsfeed on Twitter, get our media from Netflix recommendations, and travel via Uber…the list goes on. Money was just one of the next things on the list. So a currency that is not subject to or traceable by any conventional authorities ticks a lot of boxes.
Bitcoin is just the latest expression of taking back control – and it has chimed very nicely with a time when money-printing has gone into overdrive. There is currently a lot of money sloshing around the system looking for the next big thing. The fervent believers and the get-rich-quick speculators are, for now, on the same page. We’ve seen in the last year though that this combination of investors and fixed supply can lead to sharp moves in price driven by greed and fear – Bitcoin has proved that all investments do go down as well as up– and that this volatility is likely to continue. We are watching with interest to see whether Bitcoin stays in the margins of the financial world, or whether this is an idea that is here to stay.
- I’ll tackle the technology behind Bitcoin – the blockchain – in another post; many onlookers believe that it is the underlying technology that carries the real potential for change.
