Bitcoin’s first wave a few years ago sparked headlines of instant millionaires and speculators heralding an economic revolution.
The fact that there was as much enthusiasm as outright derision from the investment establishment pointed to a world that didn’t really understand cryptocurrencies and got too excited or too sceptical.
It didn’t help that J.P. Morgan chief exec Jamie Dimon flip-flapped between calling the whole thing a ‘fraud’ and then seemingly coming round to the idea of the blockchain.
Maybe we just needed time to reflect on it all. The sector’s time in the wilderness since 2017 gave us just that.
So, with even higher highs this time around, what’s changed and is there now a place for the crypto industry among our more traditional ISA assets?
How are we thinking about crypto?
Bitcoin and co. are still going through a bit of an identity crisis.
Should we treat them like currencies, or assets like equities and bonds?
Confusingly, crypto fans lie on a spectrum of wanting to disrupt money as we know it at one end, to taking a punt in the sector with their life savings at the other.
If you remember the end of 2017, you’ll recall that a lot of the reticence among the sceptics was based on this balance being ill-defined and the asset being used for speculation, not as its initial purpose.
Three years on, we’re still treating it as a speculative asset even if its latest rise has a bit more nuance attached.
In times of geopolitical uncertainty, and when other assets seemingly carry too much short-term risk, gold has traditionally been the ‘safe haven’ investors flock to.
Renewed virus fears, a looming US election and ongoing Brexit negotiations meant we saw a huge spike in demand for gold last summer.
The pumping of coronavirus support packages into world economies has left a few feeling less confident about existing currency structures.
The dollar is traditionally the go-to for worried currency investors but, with the US part of that concern, many have turned to the country-less crypto alternatives.
The decentralised nature of systems like Bitcoin can start to seem attractive if you don’t like the look of what the world’s central banks are doing.
This use of crypto as a store of value means it’s more akin to a commodity now, as opposed to almost being treated like a speculative equity in 2017.
The new gold?
There are a few issues with putting it in the same bracket as gold and the precious metal universe. The first is that we’re still figuring out the use of crypto on a global scale.
It might be a way to alleviate currency concerns in developing nations. But it might just as easily facilitate an ever bigger black market than it already does.
We just don’t know.
And that’s if we even treat it as a currency, which we aren’t doing at the moment. Comparing its use to buy and sell against existing methods makes it look clunky, slow and expensive.
Mainstream use would also beckon the very thing it opposes: regulation.
At the very least, gold has significant commercial and industrial uses which give it a purpose if it loses its commodity shine.
What’s more, the last time Bitcoin was making the headlines it was due to its fall from $20,000 to around $3,000. That makes its newfound ‘store of value’ label precarious at best.
We could talk more about the volatility, lack of liquidity and how difficult it is to value the likes of Bitcoin but the Financial Conduct Authority (FCA) put it much more succinctly:
Investors should be prepared to “lose all their money” they put into a crypto strategy.
The regulator also warned that some crypto firms may be bending the truth when it comes to laying out the risk-reward ratio on offer.
Another point is sustainability. Mining for precious metals very much carries its own challenges but bitcoin and the like aren't immune to this. According to the BBC, the energy used in mining Bitcoin is equivalent to the level of energy consumption for the whole of Switzerland.
All or nothing?
The FCA is right to call out the intrinsic risks. That’s to be expected.
And a quick look at some of the recent crypto mining poster-kids shows just how important that risk messaging is.
So far, the crypto industry has offered ‘all or nothing’ frenzies. If we’re to get a viable currency out of the movement like was first intended, we’re going to have to manage this high octane side.
UK-based Argo offers a global data centre which allows consumers around the world to mine cryptocurrencies for a monthly fee.
Cast your mind back to the images of the gigantic warehouses needed to generate crypto a few years ago. This mining-as-a-service model shows that even the innovators can be innovated.
The likes of Riot and Online Blockchain have seen a spike in interest too.
One reason could well be that investors are looking for listed exposure to the theme without having to sort out wallets themselves.
While demand for second-order companies exists and the dearth of pureplay ways for investors to access crypto on main exchanges continues, they might have an advantage.
So is it a good ISA diversifier?
The jury’s still out.
But is it an alternative to gold? No. Not yet.
We’re one big drop away from forgetting it again for a few years. But then there are patterns like the dot.com boom which was misguided in a lot of cases but, as a movement, was just too early.
Legitimacy is a big issue for many investors, as well as evidence of long-term viability at its core function.
If crypto, as a sector, exists purely to be a speculative asset, and attracts fringe interest where risk is often unmeasured and loose, it’ll fail to garner support from the mainstream.
But the more big companies and investment trusts like the Ruffer Investment Company start to dip their toe in the water, the more it will be legitimised as a speculative diversification tool.
For the everyday ISA investor, the takeaway should be that the sector has a history of disappearing as quickly as it came into town, and the FCA still isn’t convinced.
It may eventually become a mainstay of investing, in which case, early adopters in the miners could still be rewarded in the long term.
If you are planning to add a bit of blockchain to your portfolio just make sure you bring a good amount of risk management (and a super long-term time horizon) with you.
Look before you leap.
- The (more realistic) ISA millionaire
- Individual Savings Account - Guide
- How to invest in stocks - beginner's guide
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