Should investors stay well away from bitcoin?

Yes - Mark Haefele

From financial market obscurity to dinner party conversation staple, bitcoin’s rise in the public’s consciousness has matched its meteoric price gains. But the 50 per cent drop in value in the most well-known cryptocurrency since its December 2017 peak provides an opportunity for a more sober assessment of the market.

Cryptocurrencies’ price rise has all the hallmarks of a classic speculative bubble. Cryptocurrencies are relatively new and even evangelists admit the real world benefits may take years to materialise. The relatively high volume of turnover, against limited real-world use, suggests many buyers are seeking speculative gain. A 1,600 per cent increase in bitcoin prices last year and an absence of any fundamental economic backing suggests a bubble. At its peak the price gains in bitcoin far surpassed all other historical speculative bubbles, including Dutch tulip mania, the South Sea bubble and the dotcom bust. We would recommend participating as neither a buyer nor a seller in cryptocurrencies. The risk of an even more severe collapse in value cannot be ignored, but calling an end to the bubble could be premature; cryptocurrencies have recovered from earlier deep setbacks. 

We are highly doubtful whether cryptocurrencies will ever become mainstream currencies. Successful currencies act as a store of value and central banks take a lot of trouble to keep a currency’s value roughly stable, including issuing and withdrawing supply to match demand. 

But, while the supply of individual cryptocurrencies, such as bitcoin, is limited, the supply of alternatives is potentially unlimited, creating the risk of a collapse in value. There are already more than 1,000 cryptocurrencies in existence. Bitcoin remains the biggest, but its share of overall cryptocurrency market value dropped to 36 per cent in early January from 56 per cent just one month before, according to CoinMarketCap data.

 A successful currency also needs to function as a means of exchange. Bitcoin is a poor transactional tool: the popular Steam gaming platform dropped bitcoin as a payment option in December because of high transaction fees and wild volatility. The need for companies and individuals to pay tax receipts in government-issued currency also argues against widespread adoption. Cryptocurrencies are unlikely to be banned completely, but regulatory action aimed at restricting their production and trading may limit broader usage and increase the potential for price volatility.

We see greater potential in the blockchain technology underlying cryptocurrencies, which could lead to significant disruptive technologies in the coming decade. But technological shortcomings still need to be resolved. It remains unclear which specific applications will prove most useful, and actual revenue and profitability associated with the industry is currently limited. 

Recent sharp stock price gains by companies that have simply added the word ‘blockchain’ to their name illustrate the need for caution. But we estimate that blockchain could add as much as $300-400bn of annual economic value globally by 2027. 

No - Nigel Green

As fintech continues to advance at lightning speed, the way in which we access, manage and use money has changed radically, with digital currencies firmly in the limelight. Indeed, with total market capitalisation surpassing $500bn in the first month of 2018, cryptocurrencies are now widely referred to as gold #2.

Far from a passing whim.

In fact, a 50 per cent market drop is forecast this year as crypto prices become more stable, therefore resulting in a higher and more sustainable market cap of $1tn.

According to bitcoin pioneer, Wences Casares, Bitcoin, blockchain and fintech “could change the world more than the internet”.  Quite the statement. But there are numerous advantages to digital currencies that support Mr Casares’ viewpoint.

Looking at bitcoin in particular, this cryptocurrency has a set supply of 21m bitcoins. As such, many economists state that this cap does indeed make it more coveted than gold.

However, there are no concerns over a purported ‘digital gold rush’ with bitcoin. There is not a secret supply of the currency waiting to be unearthed, which would lead to a price crash due to excessive supply.

Furthermore, a number of financial experts claim cryptocurrencies have sufficient potential to be a much more efficient commodity in the future, with significant benefits. The decentralised nature of digital currencies and their underlying blockchain technologies provide substantial plusses over conventional funding and transaction platforms. 

In addition, cryptocurrencies can be divisible to any extent, meaning they can be utilised to buy a car as easily as they can to purchase a magazine.

Moreover, digital currencies are constantly progressing and improving, as technologies evolve.

In contrast, certain opponents of digital currencies say it is hard to see their value, not being able to physically hold them in the same way as monetary notes or coins. Yet, you only need to look towards organisations such as Amazon, Google, Facebook and Apple, fundamentally digital businesses, which were established on and depend on digital trust and confidence.

Indeed, the world has changed profoundly in three main ways that support the ongoing rise of cryptocurrencies.

Firstly, technology. Our lives revolve around tech, and this will only increase in the future. 

Secondly, politics. The demand for privacy from non-government or bank-controlled currencies is growing. With the use of cryptocurrencies, there is no obligation to disclose information relating to identity, location or the transaction itself. 

And finally, globalisation. The world is becoming more globalised than ever before. As such, people are now more inter-reliant and globally-focused, which can provide significant benefits for international trade and commerce.

Naturally, there are sceptics who view cryptocurrencies in something of a capricious bubble. Maybe they will be proved right. No-one has a crystal ball and, as such, caution is urged. Perhaps those concerns are spurred on by nations such as South Korea imposing sweeping anti-crypto restrictions. 

There is every sign that demand for cryptocurrencies will increase and, therefore, prices. Large returns are possible but as is always the case with investments, and even more in this uncharted sector, investors are advised to ensure they are properly diversified to mitigate risks. With this in mind, crypto should only be a small percentage of an individual’s wealth.