Whatâ€™s Behind The Interest In Bitcoin?
23rd February 2018 Ben Kumar, Investment Manager, Seven Investment Management
There is a particular buzz around 'Bitcoin' but what is it all about.
If a new asset class has ‘arrived’, particularly when it’s investable, multi asset managers really should look into the opportunities. And there is a particular buzz about Bitcoin – indeed in cryptocurrencies in general – which really started to gain traction last year.
Over 2017, searches for Bitcoin in the UK using Google increased some ten-fold and the price of Bitcoin saw similar increases – although both numbers have fallen back since the run up to and around Christmas when they both spiked. A lot of those searching are seeking an answer to some variant of the question “what is Bitcoin” – a query that we have increasingly heard from our clients.
7IM has no investments in Bitcoin, but we still wanted to summarise some Bitcoin basics (which could indeed apply to cryptocurrencies more generally), as well as highlight some of the reasons why people are so excited. At this point though I think it’s important to flag that this is aimed at providing you with some background information rather than suggesting you rush out and buy into what some are calling the 21st Century’s Gold Rush.
What makes Bitcoin a Bitcoin?
First off, some of Bitcoin’s appeal is because it’s a truly digital currency. Most currencies are primarily digital these days, given that fewer and fewer transactions over time now involve someone handing over some physical notes in a shop and especially given how we pay in mortgages, rent and salaries etc. But Bitcoin is truly digital since it moves through financial systems faster than conventional currencies, which makes sense since it was supposed to be digital from the outset. Think… settlement periods, or two to three business day wait times, reduced to zero.
Another plus for many is that Bitcoin is a decentralised currency. This means that there is no central control and no government or central bank has the responsibility of controlling the amount of currency in circulation, as the Bank of England does with the Pound. Instead, the only control is being exerted through an autonomous computer code that cannot be overwritten.
A related point is that Bitcoin is a finite currency. As above, central banks have been taken out of the picture and there will only ever be 21 million Bitcoins in circulation. The central banks’ response to boosting economic growth through Quantitative Easing following the Global Financial Crisis won’t ever happen. This is an advantage as far as many Bitcoin enthusiasts are concerned.
The last plus for many, but definitely not the least, is that Bitcoin is a completely anonymous and completely transparent currency. In this apparent paradox, its transparency stems from everyone being able to see where any Bitcoin is held and if it gets traded. Everyone instantly knows if a Bitcoin is traded by Person A to Person B. The element of anonymity is that the identity of Person A or B is only seen as a randomly generated string of characters – no one knows who they actually are. As a result, people can have faith in the overall system, without actually knowing who is participating.
What’s so thrilling?
We believe that the reasons most people get really excited about Bitcoin – other than the current surge in value – comes down to being able to take control in today’s high tech day and age. The authorities (aka governments and central banks) are seeing far lower levels of trust than they have enjoyed in the past, while – at the same time –individuals have more of an opportunity than before to be able to express themselves. People have become used to being able to control their lives through the advances of technology.
Newspapers have been replaced by personalised social media newsfeeds, TV schedules have been thrown out in favour of Netflix recommendations and travel timetables superseded by the freedoms available through Uber…and that list could go on. Money was simply another thing on the list to be reformed. Meanwhile, a currency that is not dependent on or tracked by the conventional powers obviously satisfies many people and supports success.
Bitcoin is just the latest example of people taking back control. When that’s coupled with a time when money printing has gone into overdrive and a lot of investor money is on the hunt for the next big trend, both eager believers and speculators alike are on the same page – at least for now.
We have seen a number of times, however, where the combination of impatient investors and a fixed supply can precipitate dramatic price changes, largely driven by fear and greed. Bitcoin seems to be setting out to prove that all investments can go down as well as up to the point where you could lose more than you originally invested. This volatility looks likely to continue.
Meanwhile, here at 7IM, we are watching with interest as to whether Bitcoin will remain in the margins of the world of finance, or whether eventually it becomes something that we would invest in over the long term.
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