Investment Insight | The case for Bitcoin
In March 2018, we wrote that over the years we have kept our approach to new investment opportunities pretty simple. If, upon thorough analysis, a purchase offers both the opportunity of a return and safeguards against a total loss of capital, we will consider it as a candidate for investment. Therefore, in 2018 our answer to clients on would we invest in Bitcoin was No!
Since then, a lot has changed within the cryptocurrency asset class. We have remained open-minded and curious and now we believe we are somewhere similar to the advent of the internet with digital assets and cryptocurrencies; that is, two to three years away from universal acclaim.
Store of value
Financial assets comprise the largest store of value in the world. The newest entrant is Bitcoin.
A store of value is anything that holds its purchasing power in the future. It is a function of people’s perception of worth. Even tulips at one time were considered a store of value. Gold and oil have historically been reliable stores of value. Because they are scarce commodities, they make dependable hedges to inflation. As a result, they have commanded price premiums above and beyond the demand for their consumption alone.
For the last 75 years, the United States dollar has been a reliable store of value. This is a result of its comparatively good management by the Federal Reserve and the reputation of the United States economy. In fact, it is the most widely held currency in the world and recognised as the global reserve currency.
With that said, the investment thesis for Bitcoin is both simple and compelling, hence its global appeal. It is (relatively) accessible to all, is accepted worldwide, is not controlled by a central bank, and is limited to 21 million units. Bitcoin shares many of the same attractive properties of the United States dollar, oil and gold that have made them a great store of value for centuries, and Bitcoin has modernised and improved properties that position it as an attractive complement.
Legitimate asset class
While Bitcoin’s scarcity puts it alongside gold as a tool to help protect against currency debasement, there is increasing interest and participation in Bitcoin among institutional investors. Why? The security and custody arrangements now make it a legitimate component of portfolio construction.
Entrants like Fidelity and ICE (owners of the New York Stock Exchange) are bringing a high degree of trust and professional expertise to the custodianship of digital assets. Bitcoin can now be held safely like other hard assets such as gold.
Insurance providers like Lloyds and AIG are now underwriting policies to protect digital asset custodians against theft and hacking, adding additional safeguards to keep investors’ assets protected.
COVID-19
Like many technology companies this year, Bitcoin has benefited from ‘three years of digitalisation in three months’. It has also benefitted from the unprecedented reaction of governments and central banks to COVID-19. The current macro environment will accelerate Bitcoin adoption, introducing new investors to the space, and we expect a positive cumulative effect on its price.
Valuation potential
Today, the market capitalisation of above-ground gold (gold already mined) is conservatively US$9 trillion. Using gold as a framework, the bull case scenario is that Bitcoin is undervalued by a multiple of 45. In other words, the price of Bitcoin could appreciate 45 times from where it is today, which means we could see a price of US$450,000 per Bitcoin compared to the US$10,000 that it trades at today.
Bitcoin is not without risk. Investing in cryptocurrencies has regulatory risks, and high levels of price volatility can also be a deterrent. But the prospect of strong returns over longer periods is a powerful draw to investors. We will remain curious, continue our research and continue holding what we think will be a legitimate asset class in years to come. However, we do so with caution and will size the position in client portfolios accordingly.
Since then, a lot has changed within the cryptocurrency asset class. We have remained open-minded and curious and now we believe we are somewhere similar to the advent of the internet with digital assets and cryptocurrencies; that is, two to three years away from universal acclaim.
Store of value
Financial assets comprise the largest store of value in the world. The newest entrant is Bitcoin.
A store of value is anything that holds its purchasing power in the future. It is a function of people’s perception of worth. Even tulips at one time were considered a store of value. Gold and oil have historically been reliable stores of value. Because they are scarce commodities, they make dependable hedges to inflation. As a result, they have commanded price premiums above and beyond the demand for their consumption alone.
For the last 75 years, the United States dollar has been a reliable store of value. This is a result of its comparatively good management by the Federal Reserve and the reputation of the United States economy. In fact, it is the most widely held currency in the world and recognised as the global reserve currency.
With that said, the investment thesis for Bitcoin is both simple and compelling, hence its global appeal. It is (relatively) accessible to all, is accepted worldwide, is not controlled by a central bank, and is limited to 21 million units. Bitcoin shares many of the same attractive properties of the United States dollar, oil and gold that have made them a great store of value for centuries, and Bitcoin has modernised and improved properties that position it as an attractive complement.
Legitimate asset class
While Bitcoin’s scarcity puts it alongside gold as a tool to help protect against currency debasement, there is increasing interest and participation in Bitcoin among institutional investors. Why? The security and custody arrangements now make it a legitimate component of portfolio construction.
Entrants like Fidelity and ICE (owners of the New York Stock Exchange) are bringing a high degree of trust and professional expertise to the custodianship of digital assets. Bitcoin can now be held safely like other hard assets such as gold.
Insurance providers like Lloyds and AIG are now underwriting policies to protect digital asset custodians against theft and hacking, adding additional safeguards to keep investors’ assets protected.
COVID-19
Like many technology companies this year, Bitcoin has benefited from ‘three years of digitalisation in three months’. It has also benefitted from the unprecedented reaction of governments and central banks to COVID-19. The current macro environment will accelerate Bitcoin adoption, introducing new investors to the space, and we expect a positive cumulative effect on its price.
Valuation potential
Today, the market capitalisation of above-ground gold (gold already mined) is conservatively US$9 trillion. Using gold as a framework, the bull case scenario is that Bitcoin is undervalued by a multiple of 45. In other words, the price of Bitcoin could appreciate 45 times from where it is today, which means we could see a price of US$450,000 per Bitcoin compared to the US$10,000 that it trades at today.
Bitcoin is not without risk. Investing in cryptocurrencies has regulatory risks, and high levels of price volatility can also be a deterrent. But the prospect of strong returns over longer periods is a powerful draw to investors. We will remain curious, continue our research and continue holding what we think will be a legitimate asset class in years to come. However, we do so with caution and will size the position in client portfolios accordingly.
Source: Winklevoss Capital.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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