Strategy team: Charlie Hines and Kevin Gardiner
In our Market Perspective publication from November 2017, we wrote about what looked like an emerging bitcoin bubble. Three years on, and bitcoin is surging once again, but we remain unconvinced by its investment case.
Bitcoin has surged 157% year-to-date and is currently trading around at around $18,400 - not far from its all-time (intraday) high of just over $19,500 in December 2017. From March lows, the currency has risen 275%. Cryptocurrencies across the board have also rallied. Ethereum, the second most popular cryptocurrency has risen 372% this year and is up 420% from its March lows. Similarly, Ripple or 'XRP' - based on a slightly different technology from the blockchain that underpins Bitcoin - has also seen large increases, up roughly 200% since the start of the year, and almost 300% since March.
Despite high levels of volatility, cryptocurrencies clearly continue to gain traction, particularly amongst retail investors. For more sophisticated investors, there is now a derivatives market in bitcoin. As at writing, their combined market cap stands at roughly $600bn; of this bitcoin makes up three-fifths.
Relative to traditional asset markets, however, the size of the crypto market remains tiny - for reference, as of August 2020 the overall size of the global bond market in USD terms was approximately $128trn of notional outstanding; Apple's market cap is around $2trn. For the time being cryptocurrency remains a relatively illiquid asset.
Despite there being a finite amount of crypto coins available, there is no limit to the number of new currencies that can be created. Many jurisdictions, including the US and UK, have begun clamping down on ICOs ('initial coin offerings'), though activity has been continuing offshore. This, alongside new ways of coming to market such as IEOs 'initial exchange offering' and INX 'token offerings' make it harder to track the number of new competing currencies and highlights the market's lack of transparency and regulation. Bitcoin's very anonymity makes it something of a shady asset, with some dubious personalities at its fringes.
Some see bitcoin as an alternative currency, a hedge against inflated government balance sheets and monetary debasement, much in the way that gold can be viewed. In August, both gold and bitcoin rose sharply - with the correlation between the two prices reaching an all-time high of 70%. Bitcoin's latest surge however, indicative of its inherent volatility, shows it behaving far more like a risk asset than a hedge.
Perhaps, then, the most convincing argument for bitcoin's recent run up is PayPal's venture into the crypto space. Last month PayPal announced that from next year, US customers would be able to buy, hold and sell bitcoin within its app. This is central to blockchain's supposed appeal - its ability to be used by mainstream payment systems. However, this aside, the technology hasn't been getting the plaudits it used to - it's seen as clunky, a complicated answer in search of a question perhaps, and its promise has yet to be reflected widely in mainstream payments.
The cryptocurrency world still faces existential questions. What is it ultimately for? How can alternative stores of value be in potentially infinite supply? Given bitcoin's inherent volatility - it behaves far more like a risk asset than a hedge - and its deliberate obscurity compared to (say) gold and conventional money, we still think it has no place in private client portfolios. We are not gold bugs, but when pushed for an alternative to conventional cash we'd prefer the shiny metal to bitcoin.
Rothschild & Co. SCA published this content on 24 November 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 24 November 2020 16:22:03 UTC