Bitcoin is off on one of its wild runs again. The cryptocurrency firmly breached its previous high yesterday, rising above $20,000 a coin for the first time ever. By the time I went to bed last night, it was above $21,000 for the first time ever.
This morning, when I checked to write this piece, it was above $22,000 and climbing – for the first time ever. I don't know about you, but I'm starting to wonder if there's something to this crypto business.
Bitcoin could go to $400,000 apparently
Bitcoin has never been this high. The last peak came at just above $19,000, which was around about this time three years ago. As my colleague Dominic (who knows a lot more about bitcoin than I do) has pointed out on several occasions, bitcoin has a record of boom and bust like no other asset. 2011, 2013, and 2017 all saw booms that ended in busts – with bitcoin going up many hundreds of percent, and then crashing by about 80% on the way down.
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The past is no guide to future performance, but you can see why people might be getting excited now that it's broken back above its previous high. The most sensible bitcoin observers I know seem to think that $30,000 is the next stop. Any other asset (maybe other than Tesla) and you'd be raising an eyebrow at “conservative” forecasts of a 50% gain from the record high. But given bitcoin's history, it doesn't look at all ridiculous. And of course, on the much more aggressive side, you've got people talking six figures.
Scott Minerd of Guggenheim Investments, a pretty well-known big investor, told Bloomberg the other day that bitcoin should eventually “be worth about $400,000”. Now, to me, that sounds like someone has taken the price of gold and calculated the relative scarcities or something like that. It has a mathematical sheen of respectability but in reality there are plenty of other things you could compare bitcoin to and come up with totally different numbers.
It reminds me a bit of the 2000s gold bull run days, when you'd get ardent gold enthusiasts fantasising about how high gold would have to be if every single greenback had to be backed by the gold in Fort Knox (“which was just painted tungsten anyway”, was usually the follow-up paragraph in such speculations). Still, the point is that the bitcoin story is back out there big time – and the big difference between now and 2017, as the Minerd quote shows, is that institutional investors are getting in on the game. The smart money is no longer sneering at bitcoin – it's buying bitcoin.
This respected investment trust just put 2.5% of its portfolio in bitcoin
To take a local example, on Tuesday, the Ruffer Investment Company, a London-listed investment trust, put out a performance update to the stockmarket, noting that the managers had added bitcoin to the portfolio after reducing its exposure to gold. Here's the rationale: “The exposure to bitcoin is currently equivalent to around 2.5% of the portfolio. We see this as a small but potent insurance policy against the continuing devaluation of the world's major currencies. Bitcoin diversifies the company's (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see.”
For any other asset, 2.5% of a portfolio isn't game-changing. But for bitcoin, it's a bit different. Many would still quibble – or outright disagree – with the idea of bitcoin as an investable asset, let alone cryptocurrencies as an investment class all of their own.
Also, this isn't a desperately obscure newcomer to the market trying to gain some attention for themselves. Ruffer is one of the smarter investment groups out there, with a very good record on the defensive side. As Citywire Wealth Manager points out, the Ruffer fund's underlying portfolio (its net asset value) has gone up by just over 12% for 2020 so far, up to 8 December. That's better than several of its peers and well ahead of the 9% loss the FTSE All-Share has seen.
Admittedly, Ruffer has always been comfortable with investing in more exotic stuff. And when you think about it, it's hardly a wild gamble. If 2.5% of your portfolio goes to zero, it's not nice, but it's not life ruining. If that 2.5% has a much-better-than-zero chance, based on its historic record, of turning into 5%, 10%, or even 25% – then why not? But the point is, this is a serious investor making a serious investment in an asset that many still regard as fundamentally unserious. And Ruffer is just one example.
What is the point of bitcoin?
So why invest in bitcoin? You can read all about the blockchain and the technology behind bitcoin on the MoneyWeek site. To cut a long story short, as long as you trust the technology (and no one seems to have any real quibbles with blockchain), then bitcoin is a digital asset with a limited supply that people will happily pay “real” (or rather “fiat”) money for. I wouldn't go so far as to describe bitcoin as digital gold – that risks giving the wrong impression. Bitcoin won't help you much in an apocalypse scenario where all the computers and electricity have gone off. And, while I'm reasonably confident that gold will still have value 100 years from now, I'd be far less confident about leaving a bitcoin password in a locked vault for my great great grandkids.
But one major benefit of bitcoin – and this is where it surpasses gold – is its portability. In a world of ever-increasing capital controls and regulations around the movement of money and the privacy of the individual, a currency which needs no intermediary and no government backing, which exists only online, and which has value wherever you are in the world, has an awful lot going for it. If you need to hightail it to another country because the political situation in your own deteriorates dramatically – an unlikely scenario for us here in the UK, but not an impossible one, and certainly one that many people in less fortunate countries have faced over the years – then bitcoin is a pretty good means to move your wealth around.
That's not bitcoin's only use, but I think we can agree that it's quite a handy one. And in our current environment of escalating financial repression, it's a use that will only become more pertinent.
Look, you can totally ignore bitcoin if you want to. I wouldn't panic and think you have to rush to buy or even educate yourself on it. If you've got a solid asset allocation plan that you're happy with, there's no need to upturn it for crypto. Especially as it's clearly going to become a lot more accessible in this phase of its evolution – for example, if you own RICA, you now own a tiny bit of bitcoin. But if you have the time and the energy – and I'm not saying anything that we haven't said before here, Dominic in particular – I think it's worth getting to grips with the sector and owning a bit. Just in case it gets even bigger.
We'll be writing more on this in MoneyWeek in the New Year. With any luck we'll time that bitcoin cover to coincide exactly with the top just as we did last time in 2017. If you want to be ready for that, subscribe now and get your first six issues free – just sign up here.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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