2020 has been a terrible year, but winners always emerge from crises and Bitcoin is inarguably one of the standouts: it smashed through its 2017 record to hit an all-time high of $19,864.15 at the start of the week, crowning growth of over 170% for the year.
As if more breathlessness about the cryptocurrency was required, Olympian rowers – and Bitcoin billionaires – the Winklevoss twins then waded in to predict $500,000 within the decade. For the avoidance of doubt, that’s per coin – not a (virtual) roll of them.
Their thesis is based on Bitcoin replacing that time-honoured store of value, gold, and it’s easy to see their point. As the metaphorical money printing presses whir around the world, the hunt for protection against inflation is on. And if that asset can continue to soar and be anonymously held safe from tax-hungry governments and robbers alike, then really, what investor wouldn’t jump in?
And jumping in they are, right across the spectrum from the biggest institutional investors all the way down to grannies with £18,000 to spare who want to follow in the footsteps of the wealthy. Their sentiments seem clear: almost three-quarters of millionaires have invested in cryptocurrencies already or plan to in the next two years.
Serious or speculation?
Crucially, however, this survey didn’t specify Bitcoin, nor even more importantly what proportion of their assets were being piled into this digital gold rush. These details are important. Serious investing and small-scale speculation are worlds apart.
As anyone who has seen the abundant advertisements will know, Bitcoin is far from the only kid on the block (although it is certainly the biggest and baddest). Ethereum, which has risen fourfold over the past year, is rapidly becoming a household name. Ripple’s XRP and Litecoin are just a few others you might hear: there are thought to be 5,500 cryptocurrencies globally now.
Despite its better brand pull, Bitcoin clearly isn’t the only game in town, nor might it be the best bet. Tyler Winklevoss may be confident of a 25x surge over the next ten years, but some investment experts are predicting a brutal correction of 50% before too long. This would be very much of a piece with past performance – yes, rising impressively overall, but my, what a wild ride along the way. Lest we forget, Bitcoin plunged 80% over 2018.
For those convinced of the rationale, but less keen on the rollercoaster, getting exposure to a diversified basket of cryptocurrencies through a fund could be very appealing. Also of note are the Exchange-Traded Products that allow investors to own a little bit of Bitcoin, or others, without them having to stake so much on what may well turn out to be a financial flip-toss.
Growing liquidity and the emergence of a fully functioning derivatives market are powerful signs that cryptocurrencies are maturing and might soon be considered fully mainstream assets. However, that “might” remains a big one.
I love the crypto story, I really do, and I’m happy to say I have some jangling in my virtual wallet. But I’m happier still that my exposure remains relatively small change rather than my whole stack. Otherwise, I don’t know how much I’d enjoy the festive season worrying about the tanking price many see on the other side. When you need an investment to bear fruit and how long you could withstand holding a poor-performer have to be absolutely front of mind.
We must also use our whole mind when weighing up how much to allocate to this “new gold” – if at all. It’s difficult to naysay the bulls, but investors would be very wise to remember that “crypto” means “secret” or “hidden”. Many see this asset class holding out risks equal to – and possibly far greater than – its return potential.
The dubiousness of buying near all-time highs aside, investors have to consider risks that could become really real, and very quickly. While some governments are smiling on crypto, goodwill could evaporate fast if they perceive a threat to their own currencies and financial oversight. The potential for legislation against one – or all – cryptocurrencies has been spoken of in hushed tones.
More pertinently to the present is the fact that just as cryptocurrencies are beyond government control, they are also largely beyond government protection. The underlying blockchain technology may be impossible to crack, but exchanges and wallets not so much. Options for recourse against mis-selling, fraud and theft may be harder to find than, well, a Bitcoin.
In short, sensible investors have to intensively study both sides of the coin before making a call.
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.