Making sense of the cryptocurrency boom
In the last 3 months the price of Bitcoin, the 'gold standard' in cryptocurrencies, has more than tripled from circa US$10,500 to over US$37,000 per coin. Crypto evangelists make many claims about the future utility and value of bitcoins including its potential to replace existing currency systems along with grandiose claims of future value. It's decentralized and limited nature is an attraction for investors who have been jaded by endless bouts of issuance of fiat currencies by governments globally.
Much of the confusion around Bitcoin and other crypto-currencies stems from the question of whether these digital assets are an asset or a medium of exchange. A medium of exchange's core attributes are fungibility (standard and mutually interchangeable), portable, and commonly accepted. The key features of an asset are: that it is controllable (for the benefit of its owner), transact-able and has clear future value and utility. We believe that Bitcoin aligns more closely with being classified as an asset rather than a medium of exchange.
Which leads us to a simple question: what is the true future utility or value of Bitcoin? There is material uncertainty around this figure, even from the most hardened crypto advocates. This also explains to a large degree, the enormous volatility inherent in the asset itself including multiple draw-downs of over 50% over the years. There has been a strong correlation in Bitcoin price movements to more conventional liquid assets like stock indices, albeit at much higher rates of beta. This validates to some degree the notion that Bitcoin is being treated as an investment asset class by investors at large. Interest in Bitcoin tends to correlate heavily with its price; examining search trends and other sources of data we note that new entrants into the space tend to buy into the periods of highest price growth. I recall a colleague of mine during the crypto boom of 2017, asking me whether I thought Bitcoin was a sound investment, despite the utter lack of interest in any investment class previously from this individual.
We have seen claims by some that Bitcoin is 'the new gold'; in our opinion, this is incorrect. I could go to virtually any individual living on our planet, irrespective of culture or creed, who would recognize that a single gold coin holds some form of monetizable intrinsic value. Despite Bitcoin's virtues, this would just not be the case in a similar instance. The asset's value is linked to its perceived utility between existing or new users. This leads us to a problem, which is the separation of utility from value. Bitcoin, for all intents and purposes, is useless in isolation. It relies heavily on a large number of 'nodes' around the world to operate the network and therefore by proxy, relies on free and open data flows between nations. This for us is a particular area of vulnerability, especially given the increase in geopolitical tensions over the past few years; is it too far-fetched to imagine that dataflow could one day be weaponized?
Ultimately, we believe that the rise in interest in Bitcoin and cryptocurrencies is driven by several factors: the ease of storage, perceived anonymity as well as the hope of making a quick dollar. Most prominently, I believe the most recent bump in Bitcoins value is driven by widespread distrust in government-issued fiat currencies and the lack of fiscal restraint by these entities. Many are worried about the extraordinary stimulus and 'money printing' activities being undertaken by governments worldwide and this has also been reflected in the pricing of other asset classes like precious metals and real estate. Whilst Bitcoin and other cryptocurrencies are uninvestable for ourselves, potential buyers should go in with their eyes wide open to the potential risks before investing in more exotic asset classes.
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