July 8, 2021
3 min read
Fintech and Innovation
Nicholas Flaherty - Investment Strategist - FWU Invest S.A.
It’s been an amazing run for the likes of Bitcoin over the last year, and obviously with such massive price gains it has drawn attention from all sorts of people. I have friends, for
example, that have never been interested in investing, who are now asking about
Bitcoin and whether they should invest. It’s not just one or two asking, but a whole bunch, meaning I’ve been thinking about how to explain crypto as a potential investment. And this is what I want to share with you. I’ll run through the positive aspects, followed by the negatives and I’ll weigh it all up at the end.
One of the words most associated with the likes of Bitcoin is ‘bubble’; many investment professionals will call what has been happening to cryptocurrencies a ‘bubble’. I disagree with that statement. While it is undeniable that there has been speculative behaviour over the last year in relation to many of these ‘coins’, a bubble is not something that keeps reaching new highs over a 10-year period. For example, the famous ‘tulip mania’ in 17th century Holland was clearly a bubble: prices of tulips exploded and subsequently crashed heavily and never recovered. When it comes to Bitcoin, however, we have seen tremendous price gains, also with huge crashes, but crucially, followed by strong recoveries, pushing into even higher highs. So, what I’m saying is that this is not bubble behaviour.
At the same time, in favour of Bitcoin is the current ‘Zeitgeist’. Since the Great Financial Crisis we have seen a steady rise in ‘anti-system’ thinking across many parts of Western society.
There’s been an increased lack of confidence in the traditional ruling elites, which can clearly be seen by the growing appeal of populist politicians. And part of this ‘anti-system’ thinking is the idea that these ‘elites’ should no longer have the right to ‘control’ our money; what central banks have been doing , according to this populist line of thinking, has simply been making the rich richer. In tandem, the thinking is that too much money has been printed in
recent years, especially following the Covid crisis, which also calls into question the overall value of our ‘traditional’ money.
Through the use of Bitcoin, control is taken away from the ruling institutions as money becomes decentralised, while the supply of it can also be limited, so is a perfect way to hit back at the elites. These are powerful thoughts, and while I don’t fully agree with all
of them, they are clearly important and are more than likely here to stay for the foreseeable future, meaning the underlying appeal for Bitcoin will likely
So, there are, no doubt, some strong forces behind Bitcoin, but there are also some important negatives we need to point out. For one, although Bitcoin has managed to recover from its
intermittent crashes, these episodes have still proved extremely painful for investors, with drawdowns of more than 50%. In other words, it comes with massive volatility, much more so than in the stock market.
Secondly, while the technology behind Bitcoin – the use of the so-called ‘Blockchain’ – does allow for decentralisation, this doesn’t mean that governments will just allow it to happen. As we saw in China recently, governments can crackdown heavily and can even ban Bitcoin
markets. While I do have sympathy with the people who see the libertarian potential behind crypto, we should bear in mind that the governments are the ones with tanks and guns, with armies and police forces backing up their institutional power. In other words, if governments feel like crypto enthusiasm is getting out of control, then these markets can either be stomped out or become highly regulated, and there likely isn’t too much people can do.
What to do then as a potential investor? Well, the idea that the likes of Bitcoin will one day replace traditional money is not particularly realistic – due to issues of government control – meaning that some of the very high estimations of Bitcoin value are unlikely to become true. On the other hand, the populist tendencies illustrated above are here to stay, and there are very real concerns around currency debasement with all the printing going on, meaning Bitcoin does have a potential role as an ‘alternative’ to money. This means investors cannot ignore it; it can have a place in a portfolio, to capitalize on these populist tendencies, but it should not be a particularly big investment. Let’s remember, Bitcoin does not generate income, whereas companies do, while it is also intensely volatile. New investors will be better served by allocating the bulk of investment capital into a solid mix of stock and bond funds. By all means, allocate some to crypto, but please don’t put all your savings into it, or even
half of them. If you do take the plunge, wait until one of the intermittent drawdowns and make sure you get in at a decent price.