Bitcoin has started 2021 with something of a bang and Clarion is receiving increased interest in our position on the cryptocurrency from our clients. Here our Investment Committee chairman Sam Petts analyses the pros and the cons.

Bitcoin has come a long way since the first transaction, a purchase of two Papa John’s pizzas for 10,000 bitcoins in the US, in 2010.

At the time of writing, Bitcoin is trading at just over $38,000, after hitting a record high of $41,528 in the first few days of 2021. That would be one very expensive pizza if ordered today.

The digital currency also crashed 28% over the following weekend and hit a low of $30,000 during the same month. There is certainly huge volatility.

Speculative trading went through the roof as lockdown boredom took hold in 2020. Gamblers took to different markets to get their kicks as the whistle was blown on competitive sport.

In the US, the $1,200 ‘corona cheque’ the government distributed to encourage spending had the unintended consequence of increasing Bitcoin investment rather than a fiscal stimulus to business and the economy during the pandemic.

During 2020, we also saw the ‘halvening’ – a four-yearly event designed to produce scarcity in new bitcoins. New bitcoins continued being added to the system however the rate fell from the 12.5 released every ten minutes to 6.25.

Together, they were the perfect ingredients to drive up the price in this crypto boom.

So, what is enticing both retail and institutional investors to take the plunge?

People see value in money that is free from government control and bank fees, particularly in times of crisis. Fears stemming from everything from the credit crunch in 2008 to the huge financial impact of Covid-19 have caused people to look to the unconventional for value.

And there are signs that digital currencies are making the move towards the mainstream. Online payments business PayPal has announced it will allow its customers to buy, hold and sell cryptocurrency from their account with payments being settled using fiat currencies, such as the dollar and the pound.

There is also the high risk/high reward temptation of investing in Bitcoin. It ended 2020, a spectacular 305% higher, dwarfing returns on mainstream asset classes such as gold, the usual refuge in turbulent times, gaining a measly 25% in comparison.

Investment company Ruffer has come out strongly for the future of bitcoin saying that we are at “foothills of a long trend of institutional adoption and financialisation of bitcoin”.

However, many others are more circumspect, put off by its volatility.

The price fluctuations are far above standard asset classes. With a small number of founders holding an estimated 90 percent of bitcoin, the market becomes susceptible to manipulation – not something to which we would expose our clients.

In January the Financial Conduct Authority (FCA) delivered a stark message to the public warning them to be prepared to lose all their money.

As an unregulated currency, investors cannot rely on the Financial Ombudsman Service to settle complaints or order compensation. They are also unlikely to be protected by the Financial Services Compensation Scheme, which covers losses up to £85,000 on fully regulated accounts and investment products.

Authorities in some markets are also beginning to review cryptocurrencies. Governments will seek to clamp down on bitcoin through tax changes. The process has been somewhat curtailed by Covid-19 but be assured, once the controls begin they will bite quite sharply.

The rise in cryptocurrency has been likened to the way the internet revolution made information ‘free’, both from control and cost. Bitcoin is perfect for private, anonymous transactions, and which has obviously attracted the attention of criminals.

The taint of being the criminals’ choice of currency for laundering dirty money, scamming investors, or buying illicit goods in the dark economy is not attractive.

Comparisons have been made with the tulip mania of the 1600s or the bubble in the late 1990s. The value of bitcoin is not backed by anything, neither governments nor reserves. Its value is purely determined by people believing it has some and thus using real-world money to buy it.

At Clarion Wealth, we would advise against investing in such unstable markets. We will continue to keep a close eye on the evolution of cryptocurrencies while providing true financial planning and lifetime cash flow strategies to provide comfort and confidence for our clients.


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