BitCoin Part II – What are the risks?

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Is Bitcoin worth looking into as a way to make money? The short answer is yes, but we’re not for a minute suggesting that you bet your house on bitcoin. Bitcoin has been around for more than a decade now, been through several boom and bust cycles in that time, and proved many of its original doubters and critics wrong. And the gradual institutionalisation of bitcoin is a good sign in terms of its fundamental trustworthiness as an asset. But there are still elements of the Wild West about it.

Those of us used to the likes of Paypal or Amazon to perform online transactions will find dealing with cryptocurrency exchanges surprisingly fiddly. And as it’s all decentralised, there’s no one you can phone to reset the password to access your bitcoin address because that’s the whole point. So educate yourself, tread carefully, and don’t invest what you can’t lose.

Another big risk of bitcoin is that it becomes too successful. Central bankers have been taking the idea of a digital currency far more seriously than most for a long time now. China is working on a digital version of the yuan, and it’s far from the only nation to do so. These so-called central bank digital currencies probably represent the biggest official threat to bitcoin (and other cryptocurrencies). European Central Bank boss Christine Lagarde is the most recent central bank governor to condemn bitcoin based on its use in money laundering.

On the one hand, banning something borderless like bitcoin would likely be rather tricky. On the other hand, maintaining the government monopoly on currency insurance is a central pillar of our entire political system, so there’s a big incentive for governments to work out how to do it. Of course, read into that what you will. It is far more likely that the central government does not like anything they can’t control, so start the demonising.

On an asset allocation note, we’d also take some issue with the argument that bitcoin is gold 2.0. There are similarities, of course, such as the lack of a counterparty, the limited supply, not to mention the lack of yield-but gold has thousands of years of history literally like all of these things. In contrast, bitcoin is just under 12 years old. This long history indicates that gold responds well to declining real interest rates (i.e. situations where interest rates fail to keep up with inflation).

Bitcoin should benefit from similar factors, but it’s hard as yet to separate that
from its regular boom-bust cycles. That said, as Dylan Grice of Calderwood Capital points out, bitcoin has certainly demonstrated its worth in the face of both financial and literal oppression in countries such as Argentina and Venezuela. In short, putting a little of your money in bitcoin looks a good idea to us-but don’t sell your gold to do it.


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