Given last Joe Biden’s victory in the USA followed by his move to protect the environment, I broke the column chain I was going to cover on Bitcoin to cover ESG markets (in short ethical and sustainable models of investing).
And so back to Bitcoin and I’ll cover that in two columns: One is the upside pressures on its price and movement, and the other on the downsides. That will hopefully have you understand it’s potential either way.
Simon Sinek states in his consultative marketing book: ‘people believe what you believe’. At the heart of Bitcoin (or most ‘things’ for that matter) is belief.
The rise of cryptocurrency
Mistrust in banks, their ability to control a financial system, its interest rates, money flow and their sheer yeehaa attitude with borrowing, investing and lending has created a society that has had enough.
Bitcoin was/is seen as a potential store of value because it’s rare. You might argue that’s strange (and it is), but what’s different between that and gold. Who gave gold a value and why is it so high?
It becomes a store of value. I own ‘x’ of it and the price is multiplied by that.
The story (which is driving the price) is that a privately created currency, which by definition has low supply, can’t be duplicated indefinitely like FIAT (‘normal’ to you and I) currencies.
There is romance and accuracy in that statement, but the belief is such that it has also gathered large institutional interest.
In 2017, we wrote about Bitcoin on three occasions. Regulatory compliance and other shackles hindered it since then.
Cryptocurrency and the dark money myth
Regulators have now formally recognized it, regulated it and as such that opened the door to large pension funds et al. Moreover, the movement to bend to such regulation dissolved much of the darkness around its smell of “its where the dark money is”.
Yes, its price is volatile, but how do you value it anyhow? It’s not like a share price of an equity where we calculate its profitability followed by other clear mathematical assessments. This is based on measures. Those measures have its market cap reaching c$665bn.
For some time, Central Banks have been pumping the equity market with cash. Covid 19 and other issues have led Governments and Central Banks to offer extraordinary financial stimuli. In normal scenarios this would lead to inflation, which lowers your buying power, and so it’s seen as a protection (like gold) as a hedge to that.
Similarly, it’s also seen as a hedge against negative interest rates, a distinct possibility still. Holding your value on a blockchain that does not charge you for holding it (unlike banks in a negative interest rate environment) is naturally a good idea.
Whilst the narrative of people power is in behind Bitcoin, the reality is the top 2.8% of Bitcoin addresses own a staggering 95% of the supply of the coin. That bursts a romantic bubble of course, and I have my own personal belief as to who one of those is.
The huge surge in demand and price has come from the investments and interest of large institutions:
Central Banks are embracing cryptocurrencies and Russia, Canada, the EU and China are currently working on their own Central Bank digital currencies. That is a very powerful sign;
The US Federal Regulator also stated that retail banks can now carry out payments with stable coins. These are coins that are pegged to traditional currencies;
Visa has announced Bitcoin related credit and debit cards. PayPal allows customers to buy, hold and sell Bitcoin from their PayPal accounts;
UK based asset manager Ruffer announced they had purchased £550m of Bitcoin. For the record, that is 2.7% of their assets under management.
This was also followed by JP Morgan announcing Bitcoin had a long-term price of $146,000. Remember its CEO is on video record calling Bitcoin a fraud.
Other well known parties rate it much higher. They openly have skin in the game.
Times have changed.
Next week, we’ll look at the downsides.
About the author
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
If you have a financial question, please call 01872 222422 or visit wwfp.net.Last modified: June 10, 2021