Wellian Weekly 18.01.2021

Is Bitcoin a Currency?

There has been a lot of press recently relating to Bitcoin – especially considering the regulator recently suggested that clients should be prepared to lose their entire investment – fresh off the heels of their paper in October where they banned the sale of crypto-derivatives to retail consumers.  The reason why there has been a lot of press is probably due to the stratospheric price rise seen in the cryptocurrency with it hitting $40,000 already this year.

This year is only a couple of weeks old and has seen the press highlight the investment company Ruffer profit to the tune of over £300m for their investment in Bitcoin – from an investment made not long before the end of the 2020. There are potentially huge gains out there, but does that make it a good investment?

Bitcoin is becoming talked about on an ever-increasing basis and column inches are making it into lots of mainstream press. Jamie Dimon, CEO of JP Morgan has done a full 180 degree change over the last couple of years – he is now talking about it being part of a portfolio and it was alleged in the summer of last year that Goldman Sachs were exploring the possibility of setting up a crypto desk for trading due to demand from a number of their (I would imagine hedge fund and day trading) clients.

But what exactly is it?  This article is not going to go into any depth, history, or justification as to what it actually is, but will throw a number of questions out there (probably with no answers).

Any “investment” brings risks, not only the risk of total capital loss, but arguably the risk of missing out on huge potential gains is one. I think the following questions need to be asked and understood before any decision can be made.

Is it a currency though? Well that all depends on what you define as currency. It can be bought and sold and used as a medium of exchange, so I guess you could consider it one, but in that measure, barter could also be considered a currency.

Currency is usually backed by a government. Bitcoin is not backed by any government.

Currencies are issued by central banks. Bitcoin has no affiliation with any central bank.

Paper currencies are traceable (they have a unique number) and work their way through a banking system and this can be very useful – for instance, the police helped narrow the field of suspects in the Yorkshire ripper case when they found a new £5 note in the purse of one of the victims.  Bitcoin is entirely anonymous and is a favoured source of “funds” for transacting many illegal activities.

If a note gets ripped in half, it can be taken to a bank and replaced. If you lose your bitcoin key, or part of it, you’ve lost everything.

Central banks dictate how many notes are in circulation (and this can help create / stifle inflation.) Each crypto currency has different amounts. Bitcoin for instance can only ever have 21m coins.   The inventor of Bitcoin created a very interesting way to get Bitcoin into circulation and you need “mine” it (through computing time working out algorithms).

You have to keep bitcoin in a password protected electronic wallet.  Lose the password and you have 10 attempts, otherwise it’s lost for ever. Leave your cash in a safe and forget the combination, there will always be a way to re-connect your money and yourself.

Bitcoin is bought and sold on numerous exchanges. Not all exchanges are compatible with one another and transfer between exchanges and wallets is not (a) easy (b) quick (c) necessarily possible. Not all exchanges are secure – certainly not like Fort Knox.  Many cryptocurrency exchanges have been hacked and all the proceeds stolen with those having their entire wealth stolen.

A US Dollar printed in Fort Worth is not only spendable in Fort Worth, it is also legal tender in Texas, the rest of the US and honoured pretty much all over the world. Bitcoin is banned in a number of countries.

There are literally hundreds of crypto currencies. They are not equally created or accepted.

When looking at the chart below, should a currency move like this? This chart uses a bitcoin ETF and a series of currencies going back to the launch of the bitcoin ETF (2018) using Pounds Sterling as the base. When you consider currencies such as the Indian Rupee, South African Rand or the Brazilian Real being considered “volatile”.

Maybe there is a taxonomy issue in calling crypto a currency.  Maybe it should be considered a different investment instead. Maybe it shouldn’t be considered a traditional investment though and therefore a differentiator and a diversifier.

One thing it shouldn’t be called though in my opinion is a currency.  The other day I saw a tweet that said, “I don’t consider Bitcoin a currency due to the movement in price means I don’t want to spend it.” Surely currencies should be spent. If nobody wants to spend them, how can they oil the wheels of commerce?

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