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Bitcoin: Should you invest in the crypto-currency?

Bitcoin: Should you invest in the crypto-currency?

Bitcoin took a small step towards mainstream financial acceptance last week, with Fidelity’s announcement that employees can now spend the crypto-currency in its in-house canteen. Clients of the US fund giant will now also be able to add any bitcoins into the valuation of their portfolios.

Fidelity is not without interest in promoting the technology. The company’s chief executive Abigail Johnson recently described herself as a ‘believer’ and the $1.9 trillion fund house has a small unit devoted to mining both bitcoin and rival digital currency ethereum.

Her choice of words also revealed a stark truth about crypto-currencies, more than five years after they exploded into public consciousness: investment in their potential is often a matter of faith, rather than reason. So what is the chance the technology will begin to be adopted by the City?

 

Credibility

Charlie Morris, chief investment officer of Newscape Capital, said that Fidelity’s willingness to put its credibility behind crypto was a small but important step toward its normalisation in high finance. 

‘The most exciting thing for bitcoin that has happened in the last few weeks is the Fidelity announcement,’ he said. The investment community has never grasped its significance, he believes, writing it off as a gimmick or a waste of time.

‘The message here is there is a very large fund management company, which says this is a new asset class, and [tells its] employees can you please go and learn about it.’

He added that take-up has been inhibited by misunderstandings as fundamental as how to categorise it. ‘Bitcoin is not a currency. It throws everyone off guard and the conversation starts the wrong way. It is an asset.’

Fidelity is not the only one that has been adding to Bitcoin's credibility recently. 

Hargreaves Lansdown made bitcoin available to retail investors through its Sipp and brokerage accounts in the form of an exchange traded note (ETN) provided by Swedish company XBT Provider.

 

Volatility

The announcement came in a week which has starkly illustrated some of the challenging characteristics of a young, untested and relatively hard to value piece of technology. After climbing 183% against the US dollar, from $963 in January to $2,733 on May 25, bitcoin then gave up more than 15% over the next 24 hours.

At the time of publication, a bitcoin was worth $2,318. Speaking ahead of the sell-off, IG group head of market analysis Chris Beauchamp admitted this sort of volatility reduced its practical applications.  

‘Bitcoin has gone parabolic recently, which makes you ask the question how long does it go on for? It is a momentum play of the classic kind. You see everybody piling into it and then suddenly the bell rings and the hurdle changes direction, so it really is a case of treating it with kid gloves.’

He added that it is a mistake to assume volatility is a hard-wired feature, however. Much of the heaviest trading has originated from China, and was motivated by distinctly old-economy fears that the People’s Bank of China might be prepared to further devalue the yuan.

Regardless of the motivation, Morris admitted that this sort of daily drawdown mean people are unlikely to view bitcoin as a reliable way to pay for their groceries. It makes more potential sense as a commoditised asset class however, he added.  

‘With Bitcoin there is a huge amount of volatility, it used to be 400% some years ago and it has been falling now to probably an average over time of about 50% –basically it goings from 20-100%. To put that in perspective, gold is 18%, the S&P is 14% long term, and bond markets 10%.’

He added: ‘It behaves more like a commodity than a currency, and it is not a commodity so it is something new, it is a new asset, this is what is so exciting.’

 

Scale

It is not only volatility standing in the way of bitcoin’s mass-adoption, however: the other issue is its scalability.

A fundamental disagreement, rooted in how to make the system efficient enough to deal with growth, has bitterly divided proponents some are willing to allow greater centralisation of the computing power required to process transaction, while others are demanding that its anarchic qualities are maintained by stripping back the code used to operate.  

That has illustrated some of the inherent dangers of a system designed to comply with a buccaneering sense of online libertarianism, rather than a finance system designed to root power with a handful of all-powerful central banks and counterparties.

At least part of the recent rally has been due to some progress in bridging its divide by agreeing on a short-term fix, while effectively kicking the can down the road. 

‘It is still not something for the fainthearted. And I don’t think it’s fair in terms of the mainstream, but it will start on these things to sort of snowball,’ said Beauchamp.  

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