Cryptocurrencies: The ultimate bubble or the next greatest disruptor?

Believe it or not, it has now been 10 years since the domain name bitcoin.org was registered, and the first Bitcoin white paper was produced by the mysterious ‘Satashi Nakamoto’ (which, it turns out, was a pseudonym for the creator – who is still unidentified to this date).

It’s incredible to think what has happened in the world of cryptocurrencies since then. The first ‘real world’ Bitcoin transaction occurred in May 2010 (it was the purchase of two pizzas for 10,000 Bitcoin, in case you were wondering*).

I suppose the gentleman who bought the pizza never quite expected Bitcoin to top $19,343** at its peak seven years later: $193 million is an expensive takeaway indeed!

The cryptocurrency has had a roller coaster ride in the past year or so. Having started 2017 at $973.37, it had risen to it’s December peak of $19,323. Today it has fallen back to $6,901***. Million were made and lost in a very short time.

It’s because of this volatility that, although many people have ‘invested’ in cryptocurrencies, others describe it as no more than ‘betting’.

We asked some Elite Rated fund managers what they think:

The ultimate bubble

Peter Elston, who runs the newly Elite Rated LF Seneca Diversified Income fund, pulls no punches and warned that cryptocurrencies are both “ingenius” and “the ultimate bubble”.

“The problem with cryptocurrencies is that they don’t satisfy the necessary attributes of a currency, nor are they being treated as currencies by many people who ‘buy’ them. ‘Should I invest in Bitcoin?’ is an absurd question because currency by definition isn’t a financial asset, it’s a medium of exchange,” he pointed out.

“Cryptocurrencies help people evade taxes and purchase narcotics more easily, so it’s likely they’ll be banned once governments get their acts together.

“A more simple point to make is that currency is supposed to be a store of value and treated as such. How can something that can fall by 10% in one day be considered a store of value? Of course the reason cryptocurrencies are so volatile is that they’re not being treated as currencies but as investments. Herein lies the ultimate flaw in the ultimate bubble.”

The next great disruptor

Ben Peters, who co-manages Elite Rated Evenlode Income alongside Hugh Yarrow, argues that the potential for transformation and industry disruption actually lies in the underlying blockchain technology.

“It’s geekier than making bazillions in speculation, but it could have profound effects on contractual trust and trade in the long run,” he argued.

“Nobody like the bureaucratic tedium of filling out forms, signing contracts, dealing with banks, endlessly proving one’s identity, using middlemen, transferring money or doing any of the myriad tasks that permeate personal and business admin,” he said. “The great promise of blockchain is to codify and make those processes more robust, secure, automated, and (where chosen to be so) visible. If that can be achieved, then friction in daily lives and trade transactions might be reduced dramatically.

“Take shipping for example. Containers arrive at ports with mountains of paperwork. Records must be kept of what comes and goes. The information about the products manufacture and supply chain must be stored. The ships themselves are certified as being fit to float. But what if a digital system could consolidate all of that information and create a system where information is automatically updated as goods move around the world and are seen by all stakeholders? Blockchain technology could hold the key to a solution.

“The digitising and decentralisation of transacting is the future – but lots of questions still need to be answered and trust must be accrued. Blockchain has the disruptive power to change the world – it just needs time.”

A changing world

Jeremy Gleeson, who runs the Elite Rated AXA Framlington Global Technology fund, agrees that there are many other uses for blockchain technology that are yet to be exploited.

“The benefits of blockchain technology is that it’s scalable, secure and hard to create fraudulent transactions on. Financial institutions such as banks and insurance companies are looking at ways they can use blockchain to make operations more efficient,” he explained.

“However, at this stage, large scale, real world applications are few and far between, so it’s difficult to find good investment ideas that have decent exposure to this the technology that fit our typical investment criteria.”

*Source: Business Insider UK, May 22 2017

**Source: Financial Times, the rise – and fall – of the cryptocurrency millionaires, 8 March 2018

***As at 30 August 2018