Having appreciated over 12,000% in less than a decade, do we dare talk about a bubble? A bubble is a term we use to describe a scenario when a sector or stock’s value appears to have been “over” inflated. It’s all champagne & parties on the way up, but if/when a bubble pops, wealth is often destroyed - especially if we’ve joined the party late or placed too much faith in a single asset.
Let’s talk about volatility. In 2016, the Bitcoin market doubled to reach US$1k a coin. By the end of 2017, the frenzy had taken its value to US$19k a coin. Then the trajectory suddenly changed, with its value falling 84%, to bottom out by December 2018, at just US$3k. Over the next 12 months, its value quadrupled (US$12k) by June 2019, and then almost halved again (US$7k) by the end of the year. Then, enter a global pandemic that would shift everyone’s expectations and importantly, their behaviour. Bitcoin’s value muddled along for the next 10 months, and then from October 2020 to March 2021 rocketed away to US$63k. It then halved again to US$30k by July 2021, then doubled back again to peak at US$67k in November 2021. Talk about volatile! It trades today (11:45am, 18 Jan 2022) at US$42,322 (a 37% loss from last years’ height).
At 37% down… is now the time to buy? We’re by no means experts in this field. As professional Financial Advisers, this feels more like gambling than investing. At its core, Bitcoin is intended to be a “currency”, yet the one thing merchants need from a currency is stability. Ultimately, it’s long-term appeal is surely its rarity but, while Bitcoin may have limited supply, there is nothing to stop the continued division of existing coin… which takes me back to some lessons of history:
The manufacture of coins in the Roman culture, dating from about the 4th century BC, significantly influenced later development of coin minting in Europe. The origin of the word "mint" is ascribed to the manufacture of silver coin at Rome in 269 BC near the temple of Juno Moneta. This goddess became the personification of money, and her name was applied to money. Wikipedia
At the height of the Roman Empire, their coins were made from precious metals. In trade, “nicks” could be taken out of the coin and so the division of currency began. Over time (and to fund the economy) the Empire itself began to use alternative metals to gold and silver, until the coins themselves contained little (if any) precious metal. By this time, the currency was backed by the Issuer (the Roman Empire) and so enters a Fiat currency. Of course, no one was interested in dividing further what was essentially a “token”. Indeed, the token only had value if left intact (to be honoured by the Issuer). And thus follows a rather long and more comprehensive history with regards to coin and currency. Suffice to say, over hundreds of years, the Roman coin debased.
Currently Bitcoin can be divided by eight decimal places (0.000,000,01) and apparently, it can be divided by even more - if so ever required?! This reminds us of the early Roman coins (nicks, slivers or shavings), the underlying precious metal being the real value. But will Bitcoin prove itself as precious or rare? Does limiting the supply of something with no physical presence make it worth more? We live in a strange new world, constantly changing. For now, the fence still feels like the safest spot from which to watch this virtual story unfold.
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client. A disclosure statement is available on request and free of charge.