Should you invest in Bitcoin?

Bitcoin and crypto assets are a divisive subject. For the evangelists, digital coins represent the future of money, but to others they are an anathema, make-believe assets built on thin air. The truth probably lies somewhere in between. But in the end the success of any crypto coin or token boils down to whether it has a future use – and that comes with a huge dollop of uncertainty.

Here’s an analogy that sums it up. If I need to take my washing to the local launderette each week for the next year, and I find out that in six months’ time the price of laundry tokens will double, it makes sense for me to buy tokens ahead of the price rise. The use case is laundry, and the tokens allows me to carry out that function whenever I want. However, if I do this but then decide to buy a washing machine, I don’t need my laundry tokens any longer. I could try to sell them, but if everyone I know also owns a washing machine, I might have trouble doing so. And if the launderette closes, making laundry there impossible, I’d be stuck with a load of worthless tokens.

This logic can be applied to parts of the crypto landscape that represents projects with yet-to-be-proven use cases. There’s a chance some may solve real-world problems and make it to widespread adoption, but there’s also a big risk that they simply become ‘closed launderettes’. Some tokens have also turned out to be outright scams – the space has little regulation which means it can attract dubious characters as well as criminals.

Even Bitcoin, the grandaddy of crypto, has flaws that makes it, in our view, unreliable as a store of value or an asset that provides a return. The use cases could be superseded by something else, and it doesn’t represent a claim on anything. There is no asset behind it, save for the energy expended in its ‘mining’. There is no cashflow, and there is no interest nor dividend. To buy it is an act of faith that others will attach a higher price to it in the future, which is far from assured when there is no intrinsic value.

With no anchor of an asset to back it or cashflow to guide its path, the Bitcoin price drifts on a wild sea of speculative activity, determined by the prevailing balance of FOMO and doubt. Presently it has wind in its sails thanks to an expected looser regulatory environment around crypto when Donald Trump takes office next year. But it remains unregulated and highly volatile, which means there could be rapid and major shifts at any time.

Reasons to be sceptical of Bitcoin and crypto

1. Volatility

Bitcoin and other cryptocurrencies are largely unregulated and exhibit wild price swings owing to the lack of fundamentals behind them. Gamblers can make large gains but also face devastating losses when sentiment turns sour. In general, asset classes must provide a systematic return over time and/or provide a safe store of value. The volatility of Bitcoin and its lack of tangible value means it does not meet either of these requirements, and it defies any rational analysis.

2. Regulation

The recent increase in the price of Bitcoin and other cryptocurrencies has come about because of US President-elect Donald Trump’s encouraging words on the subject. Having previously voiced scepticism Trump recently declared, “If crypto is going to define the future, I want it to be mined, minted and made in the USA”. He has also threatened to sack the current chair of the Securities and Exchange Commission (SEC), Gary Gesler, who has cracked down on crypto during his tenure.

However, a Trump U-turn is not without precedent, and the latest frenzy could easily reverse if he changes his tune. Trump may begin to favour deregulation of crypto in the form of stable coins pegged to and backed by the US rather than a competing, closed currency such as Bitcoin or others. Ultimately, the new may be usurped by the old in a different form.

3. A waste of energy

Mining Bitcoin is energy intensive as it involves computers competing to solve highly complex problems. That’s by design. The effort and power that goes into the mining process is what gives the coin value, and many other cryptocurrencies use similar ‘proof of work’ processes. However, the huge energy consumption creates an inefficient and wasteful system at a time when energy supply is strained.

Should you invest in Bitcoin?

There is much to admire about the technology that powers Bitcoin and other digital assets, the blockchain. This enables any type of encrypted data – from electronic money to medical records – to be shared between members of a closed network. It protects the data from fraud and updates all the members concerned whenever a record is changed. It is what is known as a distributed ledger technology, allowing a network of computers to agree at regular intervals on the true state of a ledger’s position. Since anyone can check any proposed transaction against the ledger, there is no need for a central regulatory authority.

There could be some big winners from harnessing decentralised money and the blockchain. The technology is likely to have many uses, which could play out just as much in regulated markets as individual cryptocurrencies themselves. These represent a speculation, and the Financial Conduct Authority (FCA) has warned investors in them should be prepared to lose all their money. We therefore believe all crypto assets should be treated with caution and we will not include any in client portfolios.

Active investors looking for ideas for new investment can explore our curated list of Preferred Funds.