Is Bitcoin really ‘digital gold’ – and should you own some?
A growing number of professional investors are arguing that Bitcoin, the cryptocurrency, is “digital gold” and deserves a place in a diversified portfolio.
Sceptics counter that Bitcoin has no intrinsic value as few people use it to buy things and that it is unproven as a “safe haven” asset, whereas gold has been used for millennia as a store of value.
Gold has been flying this year, rising by 30pc in value, but Bitcoin has done even better, gaining 65pc to almost £9,000 per “coin”.
So should you buy some? And is it even safe to do so? Telegraph Money looks at the arguments for and against owning Bitcoin as part of a diversified portfolio.
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Gold is in vogue at the moment. Its scarcity makes it a hedge against inflation when governments around the world are printing money and spending more. It also acts as a safe haven asset when investors are worried about the economy.
Speaking exclusively to Telegraph Money, one British fund management firm with tens of billions of pounds under management said it was considering adding Bitcoin to a well-known fund as part of its gold allocation.
Its research suggested that Bitcoin could trade at $40,000-$50,000 within two years as a best-case scenario. One Bitcoin currently costs about $11,700 (£8,900).
Bitcoin has similar properties to gold, some investors argue, and could therefore thrive in a world of low interest rates mired in economic uncertainty caused by coronavirus.
Like gold, the supply of Bitcoin is limited. There will only ever be 21 million Bitcoins and the last of these to be “mined”– where computers work to create new Bitcoins – could be in 2150. Today there are 18.4 million Bitcoins and the cryptocurrency’s limited supply could be a catalyst for rising prices.
At Etoro, a broker, 70pc of investors in precious metals have also opened positions in Bitcoin in the past 12 months, which suggests that investors see it as a similar asset.
The most common argument against owning Bitcoin as opposed to gold is that it has no intrinsic value. However, while Bitcoin is rarely used as a currency, this will not stop its adoption as a safe haven, according to one investment group.
“If other humans perceive something to have value then it has value. If it exists as a safe haven in 20 years it is likely to be assumed to be a safe haven forever. We are still on a pretty steep part of the adoption curve,” it said.
At the heart of the argument for owning Bitcoin is that it offers “asymmetric” potential, meaning that the possible gains could be far greater than the biggest potential loss if the bulls are wrong.
Christian Armbruester of Blu Family Office, an investment firm, said: “Do I like it? Sure. But to be clear, the investment case is very binary. It can go to zero, but it could also go to $100,000. So one needs to adjust the investment size accordingly.”
One fund manager said: “I believe we are approaching the now or never moment for Bitcoin. In the next 12-18 months we should have a supportive macroeconomic environment that encourages institutional adoption of the asset.”
Ready for the mainstream?
The biggest risk in owning Bitcoin, according to one fund manager, is derision by investment peers and getting “egg on your face” if it turns out to be a dud.
This is part of the “credibility hump” that Bitcoin has to overcome to become a mainstream asset. Once it reaches this point, its price should rise as large investors rush to own it.
Fidelity, the American fund management giant, has more than 100 employees in its digital asset team working to bring cryptocurrencies into the mainstream and make them secure for professional investors to buy.
It said Bitcoin could be described as an aspirational store of value and investing in it today was like investing in Facebook when it had 50 million users but the potential to grow to more than two billion.
Is it safe?
Mr Armbruester said that, while he liked the idea of owning Bitcoin, it was still impossible to do so safely and cheaply as a professional investor.
“The mechanics of buying Bitcoin as a professional investor are still preventing it from becoming more mainstream and this has meant that we have not been able to invest yet. Many custodian banks continue to prevent institutional investors from investing in cryptocurrencies directly and gaining access via derivatives is very expensive,” he said.
State Street, the American fund manager, found the most significant barrier to institutional investors investing in digital currency to be cybersecurity.
However, an increasing number of American hedge funds have taken the plunge. Paul Tudor Jones, a hedge fund manager at Tudor Investment Corporation, which has around £30bn in assets, recently added Bitcoin to his personal portfolio on the grounds that it would be a store of value in an era of money printing.
He said: “I am not an advocate of Bitcoin ownership in isolation, but do recognise its potential in a period when we have the most unorthodox economic policies in modern history.”
Coinbase, the largest Bitcoin exchange for DIY investors, plans a $10bn flotation, which would represent a leap forward in legitimising Bitcoin and reducing the risk that hackers might make off with investors’ holdings, according to one investment group.