Bitcoin has staged a remarkable resurgence. After reaching a pinnacle of nearly $70,000 per unit two years ago, it experienced a significant decline of nearly 80% to approximately $15,000 a year later.
However, it has since exhibited impressive growth, more than doubling in value to approximately $43,000 at present. Despite frequent dismissals and doubts, the pioneering cryptocurrency has consistently demonstrated resilience, rebounding strongly each time.
The Argument for Bitcoin
Bitcoin can be categorized as a “scarcity asset,” deriving its value from the inherent difficulty in creating additional supply. Similar to the challenges associated with mining gold, the generation of new Bitcoins faces constraints imposed by the sophisticated computer code that governs every facet of this digital currency.
Charlie Morris, an experienced portfolio manager at ByteTree Asset Management, emphasizes the significance of limited supply in the context of alternative assets. He points out that there are currently 19.5 million Bitcoins in circulation, with a maximum capped at 21 million by the computer code. This means that 91.8% of the total possible Bitcoins that can ever exist are already in circulation.
At present, the same code restricts the annual creation of new Bitcoins to 1.8% of the existing total. However, due to a feature known as “halving” in the algorithm, this growth rate will decrease to 0.9% per year in April. According to Morris, this adjustment will result in Bitcoin’s annual supply growth falling below that of gold for the first time.
While a limited supply is a crucial factor for an asset to command a premium price, it’s important to note that demand must outstrip supply for the price to experience an ascent.
According to Morris, the enduring demand for Bitcoin remains a key factor. He points out that liquidity has persisted, allowing people to sell Bitcoin even during challenging bear markets, a resilience not observed in other parts of the cryptocurrency market. As more professional investors and a broader range of investors incorporate Bitcoin into their portfolios, the growth potential becomes evident.
Furthermore, Morris sees the advent of artificial intelligence as a favourable development for Bitcoin. He predicts that AI will soon take on the role of initiating transactions autonomously, eliminating the need for human intervention. When this transformation occurs, traditional banks may find themselves obsolete, as superior technology becomes a necessity. In this evolving landscape, a form of digital currency capable of seamless interaction with computers will be indispensable.
According to Morris, Bitcoin emerges as the clear-cut solution. He anticipates that the ongoing cycle should witness Bitcoin’s price averaging around $100,000, a significant increase compared to the $30,000 average observed in the previous cycle.
Morris notes that Bitcoin typically performs well in the year leading up to a halving event and the year following one, further fueling optimism about its prospects.
Furthermore, the decline in interest rates is expected to work in favour of cryptocurrency. With lower interest rates, investors stand to lose less in potential interest income when opting for Bitcoin instead of traditional cash savings.
The imminent creation of exchange-traded funds (ETFs) capable of holding Bitcoin directly, following the resolution of objections by American regulators, adds another reason for optimism. This development indicates a bright future ahead.
In Morris’s perspective, Bitcoin consistently rebounds and grows stronger. He believes the bear market is now behind us, and the current cycle has shifted in favour of Bitcoin, solidifying its position as the dominant cryptocurrency and a prominent component of investment portfolios.
The Argument Against Bitcoin
Duncan MacInnes cannot be easily labelled as a staunch Bitcoin sceptic. It was under his guidance that Ruffer, the investment management firm, allocated 2% of their portfolios to the digital currency in 2021. This move yielded a swift profit of over £1 billion, marking one of the most remarkable successes in recent fund management history.
However, his current stance, which dismisses Bitcoin’s relevance and its absence from both his holdings and those managed by Ruffer, deserves our attention.
MacInnes reflects, “I was once a fervent Bitcoin advocate. I’ve never had such unwavering belief in anything. We invested during the pandemic, and it seemed like the perfect asset at that time. Trust in traditional institutions was eroding, interest rates were at rock bottom, and everyone was seeking investment opportunities from the comfort of their homes.”
Now, 15 years since its inception, MacInnes finds himself questioning the purpose of Bitcoin. He asserts, “It’s no longer a viable payment tool, it hasn’t proven effective as a hedge against recent inflationary pressures, and the landscape has undergone substantial changes. Quantitative easing, the practice of printing money, has reversed course, and the tech frenzy that once gripped the market has waned.”
He elaborates, “Huge sums were poured into cryptocurrencies by venture capitalists, and many brilliant minds got involved, yet it’s difficult to pinpoint tangible outcomes from all that investment and effort. Now, there are newer, more exciting developments such as artificial intelligence.”
MacInnes also points out the missed expectations regarding institutional inflows into Bitcoin around the time Ruffer invested. He remarks, “Back then, there were talks of a substantial influx of institutional money into Bitcoin, but it never materialized. If a genuine Bitcoin ETF had launched then, it would have attracted massive investments. However, I don’t believe anyone cares anymore; there’s no pent-up demand. I believe I can prove this.”
He cites the example of the Grayscale Bitcoin Trust, a publicly traded American investment fund that holds Bitcoin. The fund’s managers played a pivotal role in overcoming the resistance of American regulators to authorize Bitcoin ETFs. Like British investment trusts, Grayscale can trade at either a premium or a discount on the value of its assets.
“In 2020, Grayscale was trading at a 20% premium, but that premium eroded, giving way to a double-digit discount,” MacInnes notes. “Why invest in an ETF and pay full price for the Bitcoin it holds when you can buy it at a discount through Grayscale? This discount reflects the lack of demand.”
Another anticipated development that MacInnes believed would enhance confidence in cryptocurrencies, at the time Ruffer invested, has failed to materialize.
Referring to the numerous frauds that have plagued crypto exchanges, he remarks, “People thought that the entry of institutions like us into the crypto space would drive out bad actors, but it didn’t happen. We continued to witness substantial investments in individuals like Sam Bankman-Fried, a convicted fraudster who operated the crypto exchange FTX. That’s a significant concern.”
What about the regulatory scepticism towards Bitcoin?
Despite its imminent launch in the United States, Bitcoin exchange-traded funds (ETFs) continue to be prohibited in this country.
The Financial Conduct Authority (FCA) of Britain has consistently cautioned investors about the risks associated with cryptocurrency investments, which aligns with our perspective. Nevertheless, there is a distinction between issuing a warning and imposing a ban, and in this instance, a ban appears counterintuitive. A regulated ETF is likely a more secure avenue for Bitcoin investment when considering the distressing number of failures observed on cryptocurrency exchanges, with FTX being one of the more extreme instances.
Reports suggest that the FCA expressed strong disapproval of Ruffer’s decision to invest in Bitcoin, as the regulator perceived it as lending legitimacy to the digital currency.
It seems that the FCA believes that the solution to speculation, fervent investors, and unscrupulous promoters is to outlaw the asset altogether. This approach strikes us as akin to suggesting that the answer to the Tulip Mania in 17th-century Holland was to prohibit tulips.
