It is no surprise that gold continues to bobble around historical highs with physical premiums on the rise as Hindus step up purchases ahead of the five-day long Diwali festival, when buying gold is considered auspicious. And with another lockdown in the offing and little political will to rein in borrowing, there is a danger we will be faced with further debasement, even though we seem to have become accustomed to deficit spending and devaluation. However, if you are looking to shore-up your finances as the UK’s balance sheet expands, there are alternatives beyond precious metals. Welcome to the world of blockchain.
One of the London market’s fintech minnows, Mode Global (MODE), has allocated up to ten per cent of its cash reserves to purchase bitcoin and adopt it as a treasury reserve asset. Management is worried that the value of investors' assets could be steadily eroded through monetary ill-discipline – to put it mildly - so it is opting for what it describes as a “reliable store of value and an attractive investment”. The former claim, though highly contentious, is at least open to debate, but you would only classify cryptocurrencies as investments in the broadest sense. The reality is they do not actually produce anything beyond supposed security of mind in a digitalised age – a somewhat nebulous concept anyway.
Admittedly, Mode Global has some weighty fellow travellers. When Jack Dorsey is not busy censoring Donald Trump, the Twitter boss has been driving investments totalling $50m into a block of nearly 5,000 bitcoins, a medium of exchange which he believes will eventually become “the world’s single currency”. That investment came via Square, Inc. (NYSE: SQ), a financial services and mobile payment company co-founded by Mr Dorsey a decade ago. His faith in the cryptocurrency may have been renewed on the back of a 55 per cent year-on-year increase in its dollar denominated value, a process aided by the US Presidential Election going down to the wire. Yet many investors would still balk at the prospect of buying into a concept which is as reliant on goodwill as any fiat currency. There is no meaningful way to value it as an asset beyond counterparty agreement. Admittedly, you could make the same claim for the US dollar, but its status as a global reserve currency rests on the size and strength of the US economy.
Proponents of bitcoin argue that its value is underpinned by its relative scarcity. But this seems a curious claim given that it is nominally a medium of exchange. Rubies are also relatively scarce, yet they have no utility as a unit of currency. True, bitcoin does offer opportunities for fractional token ownership. Unfortunately, a significant proportion of the overall issue is held by a relatively small number of individuals and corporations. It is difficult to access data on the dollar value of bitcoins in circulation (so to speak), but it is in the region of $120bn. A tidy sum on the face of it, until you realise it is equivalent to 0.15 per cent of global gross domestic product.
And even if paper notes and coins are eventually eliminated, it is worth noting that corporations are already examining means of tethering fiat currencies to blockchain technologies. National reserve banks may still be calling the tune regardless of the spread of private issuers. It is true that more people will take notice of cryptocurrencies now that the European Commission has put forward plans to regulate the market, but the real opportunity for investors probably resides in the underlying blockchain technology itself, even though commercial take-up has not been as rapid as industry analysts had originally envisaged.
