Nick Neuman - opportunity
A lie gets halfway around the world before the truth has a chance to get its boots on, and that’s as true with bitcoin as it is for other revolutions. From volatility to security, national bans to sustainability, misinformation abounds even as bitcoin itself goes from strength to strength.
With bitcoin rising in value from mere cents to $40,000 in just a decade, potential investors might be worried that the only way is down. But the revolution has only just begun.
The internet has created unimaginable value over the last 30 years, sweeping away old business models and creating new industries. Likewise, bitcoin is a great disruptor, challenging legacy monopolies in banking by providing the foundation for new financial services and enabling anyone to be their own bank.
Bitcoin’s value is tied to its utility, and this is developing all the time with innovations like the Lightning Network, supporting a new generation of web applications. Meanwhile, major corporations and even countries are adopting bitcoin, making it more de-risked than ever. You may have missed out on 10,000 per cent returns, but we are still at an incredibly early stage of bitcoin’s ascent.
China’s attempt to ban bitcoin only highlighted its resilience. Within weeks, bitcoin miners had moved to other jurisdictions and more came on stream in response to bitcoin’s biggest-ever difficulty adjustment.
For every country that attempts to ban bitcoin, another will see the economic opportunity, like El Salvador, and embrace it. Bitcoin does not care either way; it will continue to operate because it is a permissionless and unregulated network that relies on the foundations of cryptography and markets, not government. That makes adoption inevitable, and attempts to ban it, futile.
Bitcoin has taken criticism for its energy usage, but there is an inconvenient truth that opponents do not admit. The laws of economics mean bitcoin naturally favours renewable energy. Because electricity is cheapest when it is in surplus, miners are incentivised to use energy from renewables at times when demand is low.
There is a limitless supply of renewable energy, but investment in new generation is costly. Putting bitcoin mines close to wind farms or flared natural gas captures this value, turning wasted capacity into profit for operators, and helping to fund the growth of a trillion-dollar monetary network. Bitcoin is not just inherently ‘clean’ – it’s an enabling technology for the green revolution.
Bitcoin is not insecure, but treating it like cash is. Being your own bank means taking responsibility for your own security. That means not relying on third parties like exchanges to store your coins but self-custodying in cold wallets.
High-profile hacks and bankrupt exchanges have fostered the idea that bitcoin is inherently insecure. In fact, the opposite is true – once you’ve learned to self-custody.
As with everything bitcoin, it just takes a little time for users to educate themselves and learn to distinguish between the fear and the facts.
Nick Neuman is CEO at Casa
Daniel Murray - risk
Sharp increases in cryptocurrency prices have been a catalyst for growing investor interest. The prospect of high returns is particularly attractive given low bond yields and concerns from some about equity valuations following the recent strong run. However, there are significant risks that should be considered before allocating to cryptos.
The first relates to the high volatility of crypto assets. For example, the standard deviation of the monthly returns of bitcoin over the last 10 years has been around 90 per cent, significantly higher than 15 per cent for the S&P 500 index and 13 per cent for gold over the same period. From the end of 2020, the price of bitcoin increased by almost 130 per cent to an intraday high of nearly $65,000 in April but subsequently fell by 55 per cent to an intraday low of less than $30,000 in June, although it has rallied a bit since then. Additionally, intraday price volatility makes it difficult to use cryptocurrencies as a means of payment – merchants who accept payment in bitcoin or other cryptocurrencies will experience large variations in their revenues when converted back into their base currency, potentially causing a cost-revenue mismatch.
Similarly, high day-to-day volatility alongside high intraday volatility reduces the attractiveness of crypto assets as long-term stores of value.
The second risk factor relates to the lack of official oversight or regulation. This means that cryptocurrencies are wide open to being exploited by criminals as a means to scam unwary investors. For example, a 2019 academic study found that 25 per cent “of bitcoin users are involved in illegal activity” and 46 per cent of bitcoin transactions are associated with illegal activity.
While traditional financial systems and the currencies they use are certainly not faultless, they are at least heavily regulated. Furthermore, a country’s own currency has a special status as legal tender, something that underpins financial systems, augmented by monetary policy rules and trust in elected government. In contrast, because cryptocurrencies are not backed by anything other than faith in the system, damage to that faith will leave the cryptocurrency highly vulnerable.
The third factor concerns sustainability, given the computing resources involved and associated heavy power usage. According to the Cambridge Bitcoin Electricity Consumption Index, at the time of writing, bitcoin mining alone is consuming electricity at the rate of around 80 terawatt-hours (TWh) per year, down from a peak of more than 130TWh in May this year; this is more than the total electricity consumption of Austria and Switzerland at 66.8 and 56.3TWh per year respectively. And, of course, this excludes the electricity required to mine other cryptocurrencies. This is another reason why the authorities are becoming increasingly concerned about cryptos.
Overall, cryptocurrencies have become increasingly popular given the prospect of high returns. However, these high potential returns are not without risk given the high volatility, the lack of regulation and the negative environmental impact inherent in the asset class, all of which means that cryptos are coming under increased scrutiny from various monetary and governmental agencies around the world.
In light of these risks it is worthwhile recalling the old adage when investing in financial assets: caveat emptor or “let the buyer beware”.
Daniel Murray global head of research and deputy CIO at EFG Asset Management
