Given that the Wall St Journal recently reported that the world’s crypto market was valued at $2.4tn (£1.69tn), perhaps I shouldn’t have been surprised when consumer website Boring Money reported that 9 per cent of customers on Hargreaves Lansdown (HL.), AJ Bell (AJB) and interactive investor also had cryptocurrency holdings.
Freetrade, a booming investing app with a younger client base, recently surveyed its customers and found that 44 per cent of them hold crypto elsewhere – the majority of whom are male and buy bitcoin or ethereum. Boosted by asset managers such as BlackRock, Fidelity and Ruffer, cryptocurrencies have entered the mainstream – even among UK investors.
The difficulty with bitcoin and other cryptocurrencies – for me at least – is understanding what purpose they serve. There are two big problems with bitcoin as a currency: it is extremely volatile, making it a lousy unit of account, and its processing time is slow, leading to increasing transactional problems.
The most compelling case for bitcoin is probably as a store of value. Bitcoin bulls have long touted it as a hedge against inflation, which is particularly relevant now. Inflation fears are rising amid improving economic conditions and enormous stimulus packages have increased the global money supply.
Unlike sterling or the US dollar, bitcoin and other cryptocurrencies can’t be devalued by a government or a central bank distributing too much of them. Bitcoin is not controlled by any centralised authority and its supply is limited as there can only ever be 21m in existence. Each bitcoin is divisible into 100m satoshis, helping growth through smaller units of account as the value appreciates.
In The Bitcoin Standard, often cited as the first bitcoin book people should read, author Saifedean Ammous argues that its decentralised immutable monetary supply makes it the best store of value that humans have created. He also says that bitcoin is the only medium guaranteed not to be debased – no matter how much its value rises. And he argues that it has certain advantages over gold, the traditional store of value, which has a physicality that makes it hard to transport and is vulnerable to government control.
However, there is insufficient evidence to suppose that bitcoin’s role as a long-term store of value will hold true. As Man Group’s Henry Neville points out, bitcoin is currently untested with only eight years of quality data over a period of very low inflation in the developed world. Those who view gold as an unreliable inflation hedge because of its volatility should also know that bitcoin is more than five times more volatile. And there are thousands of other cryptocurrencies such as Ether, which reached a market capitalisation of over $500bn last week, so who is to know if bitcoin will retain its status.
It appears that bitcoin’s price is currently far more at the whim of Elon Musk’s Twitter account than any macroeconomic data. On 12 May, the US published higher-than-expected inflation figures which prompted a fall in US tech stocks and a drop in the value of the dollar. Theoretically, this might be a boost for bitcoin, but Musk Tweeted that Tesla (US:TSLA) would no longer accept bitcoin on environmental grounds and bitcoin fell 12 per cent that day. It is currently down about 30 per cent over the past month.
If inflation causes a recession, bitcoin could prove the opposite of a hedge against inflation if people respond by moving money into safer assets. I don’t pretend to fully understand bitcoin, but not investing more than you can afford to lose looks best for now. It may prove another iteration of the greater fool theory, a common recurrence in the history of financial markets.
