Over the course of the past decade, and even more so in recent weeks, you may have heard of a thing called Bitcoin. It’s a fairly recent phenomenon that few people understand and even fewer need to. But it’s been in the news a lot with stories of people somehow making a lot of money out of it and here at Baggette Asset Management Limited (BAM) we like to stay on top of everything, particularly things that may well one day prove useful to those we work with.

So, let’s take a look and see what all the hype is about.

Bitcoin is a cryptocurrency traded on the blockchain, created by someone called Santoshi Nakamoto. In reality this name is a pseudonym and no one knows who Santoshi is. You probably aren’t too interested in the name used by the person or persons who developed Bitcoin, you want to know what a cryptocurrency is and what the blockchain is.

The first known physical currency, dating back to around 3000BC, was the ‘shekel’. Its nominal value was derived to represent an exchange, based on an agreed weight of barley, as this was the pre-existing, accepted form of currency.

Unlike the shekel, cryptocurrencies don’t have a physical counterpart and their value isn’t based on an exchange of recognisable value, i.e. the gold standard. They are designed to exist only on the Internet and their validity is maintained by the blockchain.

The blockchain is sometimes called a distributed ledger. That’s just a fancy way of saying “spreadsheet kept in lots of places and updated simultaneously”. It means that it’s really hard to falsify records. So just as it’s hard to counterfeit physical currency, because Bitcoin and other cryptocurrencies are recorded using blockchain, they’re equally hard — if not harder — to counterfeit.

Back to the value of Bitcoin and other cryptocurrencies, another way in which they differ from more established, physical currencies — and this is what makes the blockchain element so important — is that no central bank is required to back them.

The single value of Bitcoin can fluctuate due to multiple factors such as supply of Bitcoin vs the market demand for it and the number of competing cryptocurrencies. At no point does a governing body step in and manage this process.

In October 2013 the price per coin was approximately $100. By the end of November that value had accelerated to $1075. This rally was caused by miners (individuals or cooperative organisations with access to powerful computers, often stored at remote, privately owned “farms.” using computer power to create new Bitcoins by solving a computational puzzle) entering the marketplace). Over the next seven years the value of Bitcoin continued to rise, only stagnating briefly, and by October 2017 it had reached $10,000 a coin and then soon doubled again to just shy of $20,000.

On Dec 16 2020, Bitcoin went through the psychological price barrier of $20,000. The price boosted along with equity markets by massive government stimulus measures, throughout 2020. January 3rd was Bitcoin’s twelfth birthday, and it has broken through $34,000 per coin. The huge rises in recent months can be attributed to the stimulus amounts promised to rebuild the hugely impacted economies following the theme of 2020.

SOURCE BLOOMBERG

The graph above shows the price movement of Bitcoin vs USD over the past five years.

Bitcoin has divided opinion due to the complexity and clear volatility associated with it. However, more financial institutions are embracing cryptocurrencies as payment or as real investment choices. Sheldon Xia, founder and CEO of Bitmart Exchange, a digital asset trading platform with roughly two million users worldwide, said: “Last year has already witnessed a ground-breaking evolution in Bitcoin adaptation, in 2021, we’ll see an extension of this mainstream recognition, which will guarantee a long-term bullish trend”. A bubble or a paradigm shift in how we view and use money?

BAM doesn’t perceive Bitcoin as something that would complement the Mazarin Funds or align to our values for the ways in which we approach investments. We are happy to be observers, to see the true capabilities of a digital currency to fruition, or not.

We are not proposing that Bitcoin is under/over-valued, we are simply saying that due to its very nature and recent price increases, we feel that it is an asset class we do not fully understand.  The volatility profile, the potential for a new cryptocurrency to be introduced and the barrier to real life application are some of the issues considered.  We do not however discount the asset class outright and will continue to monitor developments with the rest of the world.

Sources:

https://www.moneycrashers.com/bitcoin-history-how-it-works-pros-cons/

https://www.investopedia.com/tech/what-determines-value-1-bitcoin/

https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp

https://www.forbes.com/sites/billybambrough/2020/12/16/bitcoin-just-smashed-through-20000-whats-next/?sh=5ad3d9da4d89

https://www.forbes.com/sites/billybambrough/2020/12/15/bitcoin-and-crypto-markets-brace-for-near-trillion-dollar-stimulus-deal-and-fresh-fed-firepower/?sh=41d3080c6bb4

https://www.forbes.com/sites/kenrapoza/2021/01/03/happy-birthday-bitcoin-2021-is-your-year/?sh=2279ba545acd