5 - Bit-by-bit

Consensus view:  Bitcoin has largely been shunned by the gatekeepers of financial orthodoxy. For one, it is still not widely understood. Perhaps most saliently, its main issue is that it does not meet the definitions of being a currency: Firstly, it is not a widely accepted medium of exchange (i.e. you can’t use it on Amazon); secondly, it is not a stable store of value (i.e. what one bitcoin is worth fluctuates wildly day-by-day).

What the market is not pricing in:  PayPal has started to allow its customers to access Bitcoin, giving 26 million merchants in its network the ability to begin accepting it as a means of payment. This gives it a critical impetus as a genuine medium of exchange. Its acceptability achieved another milestone when analysts at JPMorgan suggested that a “doubling or tripling” is possible – only three years ago, CEO Jamie Dimon called Bitcoin a “fraud”. Prestigious endowment funds at Harvard, MIT and Stanford have also been rumoured to have taken positions. Earlier this year, one of the largest asset managers in the world – Fidelity Investments with $3.3 trillion assets in assets – announced the creation of its first Bitcoin mutual fund. While widespread adoption is nowhere near close, clearly the gatekeepers of financial orthodoxy are no longer as dismissive as they once were. With institutional acceptance and holding will come increased stability as these owners are less interested in short-term speculation than long-term market-making. This should provide additional stability and predictability to Bitcoin, allowing it to be a genuine store of value. With these two conditions met, it is a real currency. The mainstream can finally believe too.

Potential market reaction: While the adoption of Paypal was a quantum leap forward for the cryptocurrency, this year may well see another in the form of the total value of outstanding Bitcoins beginning to rival that of gold. Already, the value in Bitcoin ETFs is already roughly similar to that of Gold ETFs. However, a gulf still exists in the total value of gold at about $2.6 trillion (including bars and coins) versus $240 billion for Bitcoin. Should Bitcoin begin to be considered a substitute for gold – unlike fiat currencies they are both finite and decentralised - with research suggesting millennials preferring the former, the widespread adoption may turbocharge the price of Bitcoin to $100,000, a 500% increase from where it begins in 2021. Think it can’t happen? Tesla jumped 700% in 2020 as it journeyed from being a heavily shorted and ridiculed security to being widely accepted and added to the S&P 500 – all in a few short months of a pandemic year!

Our positioning:  We have no direct positions in Bitcoin as we do not consider it a legitimate currency at present. Nonetheless, we are watching developments in the space with great interest. Moreover, we believe in the underlying Blockchain technology on which Bitcoin and similar cryptocurrencies are built. Indeed, one of our flagship strategies specifically holds investments in companies that are likely to benefit from the ongoing blockchain revolution.

Chart 5:  Price per Bitcoin per $
December 2017 - December 2020

Source: Kleinwort Hambros, Bloomberg