Wealth management firms set out their opinions about a crypto-currency phenomenon that has prompted talk of "manias" and "bubbles".
It is entirely possible that by the time this article goes to press, the comments, drawn from wealth and hedge fund managers before Christmas, will be turned to dust if Bitcoin collapses, as some have predicted (such as Saxo Bank). But given that last year’s staggering rise in the price of Bitcoin from below $1,000 in late December 2016 to over $18,000 last year has happened, with some changes since, it seems remiss not at least to wonder what managers thought would be the outlook.
Rothschild Private Wealth
“We still do not recommend any cryptocurrency as an investment. Prices could rise a lot further, in which case we’ll look too cautious. But they might collapse…The number of potential bitcoins is limited, but the number of cryptocurrencies clearly isn’t. They carry no interest – not that bank deposits do at the moment, but they will again at some stage – and unlike gold, they are not attractively shiny or immune to social collapse and/or nuclear holocaust. The only attraction that we can see is that prices have been going up – a class bubble-like reason for getting involved.
"But whatever happen next to prices, the technology may transform finance – and here the investment case is stronger, if more difficult to act upon."
Agecroft Partners, a firm working in the hedge fund space
“The cryptocurrency market place is in its infancy stage and will go through tremendous innovation and evolution over the next decade. We expect the industry to experience exponential growth and at some point cryptocurrencies will be commonly used by consumers.
“It is estimated that there are currently over a thousand cryptocurrencies along with numerous service providers to the industry. Those individuals who can effectively evaluate the landscape, understand how the market place is evolving and determine who will be the future leaders in the industry will be highly successful.
“It is important to differentiate between the future growth of the industry and the current valuation of its largest player: Bitcoin. We believe Bitcoin’s current price has been bid up by hype and speculation to potentially create the largest bubble in the financial market history. Unlike a bond that pays interest or an equity that generates earnings, the only thing supporting the value of bitcoin is supply and demand. Many investors are jumping in because of the meteoric rise in price which causes further price increases. Once the price peaks and begins to fall it might not be impossible to sell until the market bottoms, which could be cents on the dollar or less.
“Other dangers to Bitcoin include increased competition from other cryptocurrencies, government regulation, and the potential loss of investor confidence from a major cyber-attack.”
Mark Ward, head of trading at Sanlam UK
“What a Bitcoin (and its rivals) is, can be thought of just as virtual money, used to buy and sell items, as you would in a shop with a five pound note – they are simply a means of exchange – it allows barter to occur online, in a virtually fraud-proof way. Whereas a central bank stands behind and stabilises traditional currencies (in the past one could exchange notes for gold should you ask the Bank of England, and UK bank notes still contain a “promise to pay the bearer” from the UK government itself), there is no bank, corporation or government acting as a backbone to Bitcoin. This is why the value of cryptocurrencies are so volatile – its value derives from the confidence in the market that tomorrow, the Bitcoin will not be worthless.
“Bitcoin is not truly a currency, at least not yet, and is best thought of perhaps as a commodity. The Dutch Tulip Mania in the 1600’s saw the price of a special type of tulip bulb rise to more than the cost of a house with an acre of land in the Netherlands, yet the intrinsic value and usefulness remained essentially nothing. But, as with cryptocurrencies, if people decide something has value, then it has value, and only time will tell if Bitcoin is another tulip-mania in the digital world, or will deliver on its promise to displace central banks and hard cash as the primary means of exchange in the future.
“One question that we often get asked at Sanlam is – “I don’t know how to mine Bitcoin, I don’t actually want to use it as currency, but I want exposure to it”. The easiest way to gain exposure to Bitcoin would be via an Exchange Traded Fund (ETF). That said we do not recommend Bitcoin as part of an investment strategy, as it has many characteristics of a bubble and something that we view as purely speculative.
“As for the future of crypto-currency, it largely comes down to three factors: whether or not Central Banks and governments release their own versions and make them the only legal tender, on indeed officially endorse a crypto-currency like Bitcoin, whether or not transaction processing speeds up from the current average of four days, and if the price volatility can be stabilised.
“Whether Bitcoin falls to near-zero like the aforementioned tulip, continues to rise like diamonds have over the past century, or simply holds steady once the market finds the level it can tolerate, is anyone’s guess at the moment, but it is certainly one to watch as it becomes better understood by the mainstream.”