The cryptocurrency has been gaining quite a bit of publicity of late.
Last week, Russia said it was considering accepting Bitcoin as payment for oil and gas exports, but only from "friendly" countries. (The rest can pay rubles, confirmed Vladimir Putin).
Back home, the Financial Services Ombudsman has warned of the risks of investing in cryptocurrencies after a sharp rise in the number of complaints it received last year about investment fraud related to the emerging asset class.
And in recent months, El Salvador became the first country in the world to adopt Bitcoin as legal tender.
Meanwhile, the value of the cryptocurrency has been swinging wildly, albeit on the rise, in the last week or so.
Is it a fad or is it an investment instrument that is likely to reach a high value over time and to which we should pay more attention?
four cents
Bitcoin, the first of the recognized cryptocurrencies, emerged out of the turmoil of the Great Financial Crisis of 2008.
As confidence in banks plummeted, an individual or group of people under the name of Satoshi Nakamoto produced a thesis on the centralized control of money.
They suggested a way to conduct a financial transaction without using an outside bank or other institution, and thus the idea of โโbitcoin was conceived.
Bitcoin is produced, or mined, by high-powered computers that solve complex mathematical equations.
The resulting unit is stored in a digital wallet on a smartphone or computer.
In early 2009, the first test transaction was carried out after the launch of the technology that supports cryptocurrency, known as blockchain.
It would be more than a year before the first financial transaction with bitcoin was made.
A Florida man ordered two pizzas with a US dollar value of $25; he paid 10,000 Bitcoin.
Therefore, a value for Bitcoin of four per cent of the US dollar was established.
fluctuating value
The pizza delivery guy would have done well to pay for the pizza with dollars and keep the Bitcoin.
On November 12 of last year, when Bitcoin reached its highest value to date, that initial 10,000 bitcoin trawl would have been worth a whopping $644 million!
But they would have had to endure periods of elation and pain with their investment along the way.
"Its value is staggering," says Anne Hayden, who has lectured on cryptocurrencies at the Institute for Investment and Financial Trading.
"But the volatility is huge, which makes it unreliable. I've always had a hard time calling it money. It's too unreliable and unstable," he explained.
And indeed, a look at a chart of bitcoin's value over the years paints a picture of an instrument that has made great strides in terms of value, but has also been marked by periods of deep losses.
For example, the cryptocurrency peaked at nearly $20,000 in mid-December 2017.
By the same date the following year, the value of a bitcoin would have dropped to almost $3,000.
A high of over $61,000 in March 2021 would be followed by more losses, but in November of that year it would reach its highest value to date.
And Bitcoin is not the only cryptocurrency.
Others, including Ethereum and Litecoin, have emerged among the best-known alternatives, but dozens exist.
They have followed similar trajectories with strong gains and massive losses.
warnings
Central banks are not fans of cryptocurrencies, but advocates of digital currencies say they would be, given that their very existence is arguably threatened by the invention of such instruments.
Peter Brown, founder of Baggot Investment Partners, says the mistrust goes much deeper than that.
"The only thing I don't like about this is all the anti-money laundering work that goes into finding out who owns what. You can't walk into the bank and deposit โฌ5,000 without telling them where it is. That's all over. it's about crypto," he says.
"It's a money launderer's dream because you can't trace who's using it," he said.
In addition, regulators have a consumer protection mandate as well as a financial stability mandate.
As recently as last week, the Central Bank of Ireland issued a warning about the risks of investing in 'crypto assets', including digital currencies, calling them 'highly risky' and 'speculative'.
โBefore you buy crypto assets, you should think about whether you can afford to lose all the money you invest. Do the promised fast or high returns seem too good to be true?โ Derville Rowland, Director of Financial Conduct at Central Bank noted.
It echoes similar warnings from the Bank of England about the possibility of investors losing their entire investment.
"Their price can fluctuate considerably and theoretically or practically they could drop to zero," said Sir Jon Cunliffe, deputy governor of the Bank.
"They're not wrong," agrees IIFT's Anne Hayden.
"The volatility is huge. No one has done much trading crypto in the last 12-18 months, unless they were buying the dips," he noted.
A study conducted by the bank concluded that around 2.3 million people were estimated to hold cryptocurrencies in the UK, with an average holding per person of ยฃ300, which represents approximately 0.1% of the wealth of a person. UK households.
Are cryptocurrencies emerging as a serious asset class?
While the aggregate portion of wealth invested in cryptocurrencies is still quite low, investment banks have started to embrace it, albeit relatively late to the game.
In a sense, they have realized that they can no longer ignore it.
"The reason banks and hedge funds get involved is because their clients want it," said Anne Hayden.
"It has a strong foundation in technology, but it's driven by sentiment. Anyone who has a lot of money in a fund will want 5% in crypto, just because they've been told they should. They don't know why," he said. explained.
Although some banks have developed their own cryptocurrency startups and their own versions of cryptocurrencies, others have offered wealth management clients access to Bitcoin assets.
Morgan Stanley was the first investment bank to do so with three separate funds, though it only allows its wealthiest clients access to what it sees as an incredibly volatile asset.
Peter Brown agrees. He said that it can be an investable asset as part of a larger portfolio. However, as an independent investment, you risk losing all of your money, he warned.
"We have something we call the Junker strategy. That's something that's incredibly volatile where you put enough money in and you're prepared to lose."
"It's like a penny stock. Your investment will most likely go to zero, but if it hits 10 pence, you've made 10 times your money. But you have to be prepared to lose your entire investment. That's the guy to bet this on." is," he explained.
Central Bank Crypto Game
Even amid their mistrust of cryptocurrencies, central banks have been developing their own versions of digital currencies.
The European Central Bank, the US Federal Reserve and the People's Bank of China are investigating different options with the PBOC implementing a pilot scheme in selected cities.
China has banned the trading and mining of cryptocurrencies like Bitcoin and its peers, but is pursuing areas of blockchain technology, where the technology remains under state control.
And it is in the area of โโblockchain that Peter Brown believes the value lies.
"It's essentially a store of information using code. Just like the beginning of the Internet, there's a lot of activity and speculation about who's going to make the best use of this technology," he acknowledges.
A bill paving the way for the establishment of a digital euro is expected to be published in early 2023 with the expectation that a version could be ready for use by the middle of the decade.
The ECB's website describes the digital currency as "like banknotes, but digital" and emphasizes that it would be designed to complement rather than replace the physical euro.
Anne Hayden says that it is to be expected that central banks will get involved in the area of โโdigital currency as there is no turning back from the concept.
"They are concerned that the emergence of digital currencies will weaken their own currencies," he says.
Peter Brown has a similar opinion, but said that the Central Bank versions are the ones that will ultimately be used.
โIf you get a regulated version, that's the one the big companies will turn to. The alternative will be the black market versions. There will always be suspicions about who is using itโ, he argues.
Others believe that Bitcoin, in particular, will have a head start and stay ahead of the pack.
Where the price will go in a more competitive and regulated environment is anyone's guess.
