I thought I would make a few observations on Bitcoin, the highly topical cryptocurrency which has enjoyed phenomenal growth.
First things first, a cryptocurrency is a digital medium of exchange. Unlike a traditional currency it is not issued by a central bank. It uses “cryptography” for security so as to control the creation of units and protect the transaction.
In November 2011 one Bitcoin was trading at US$5. It is now trading at over $6,000. To put this in perspective, if you had purchased 200 Bitcoins in 2011 for US$1,000, you would now be a millionaire.
Your guess is as good as mine as to what the future holds for Bitcoin. Many suggest that it shows the symptoms of a classic bubble while others believe there is a lot more upside in store for investors. What concerns me is that everyone is talking about this phenomenon which is often the precursor for a collapse in value.
Traditionally a currency has two properties. Firstly, it is a medium of exchange that is widely utilised. And secondly as a store of wealth. Given that you currently can’t pay for most items with Bitcoin, it certainly does not meet the first criteria which has to be a concern.
So will we recommend that our client’s invest in Bitcoin? The answer is a resounding no! One of the foundations of our investment philosophy is that all investments must be highly liquid and investment grade. Notwithstanding that many may be and may still make a fortune out of Bitcoin, we will stay on the sidelines. We are investors, not gamblers and there is a distinct difference between the two.