Desperately seeking Satoshi Nakamoto
18 Sep 2017
All the ingredients for life on earth were available in the primordial soup, but it took some unknown catalyst to create the right combinations. Similarly, all the technology to enable cryptocurrencies was around from the 1990s, but it took the financial crisis to provide the impetus required for Satoshi Nakamoto, whoever (s)he might be, to launch Bitcoin in early 2009.
Be that as it may, and despite the ongoing attentions of regulators, Bitcoin has continued to flourish and has spawned a raft of other alternative currencies. At the last count there are more than 1,100 of them, some quite large (Ethereum, Ripple, Litecoin), and many very small. It is this proliferation of alternative alternatives that is in many ways the most disturbing aspect of the story. It seems inevitable that even if an alternative currency system gains greater traction, only a minority of these upstarts can feasibly survive. I suppose they could all be acquired for Bitcoins, but more probably they will be worthless. And there is no impediment to issuing these things through what are known as Initial Coin Offerings (ICOs), which lends them a spurious air of respectability.
Let us now consider the key characteristics of a currency - to be a “store of value” and a “medium of exchange”. When I first mentioned that I was going to write about Bitcoin on August 21st, the price was $3,997. It has since briefly been over $5,000, and last Friday traded in a range between $2,975 and $3,842. That’s difficult to describe as a store of value. It doesn’t have any sort of yield attached to it, so it’s impossible to value on that basis. (I know gold-haters will make the same accusations against the precious metal, but at least it has some uses and a 6,000 year history as a store of value). Medium of exchange? I have yet to encounter an establishment that offers me the opportunity to spend Bitcoins – maybe I’m just not hip enough! – but it still seems to be a relatively difficult currency to spend, and this is where another of its flaws becomes apparent.
Unless you “mine” your own bitcoins, an activity that takes huge amounts of computing power and energy to extract anything meaningful, you have to buy and sell Bitcoin through an exchange of some sort, and this is the weak link in the system – the so-called “trusted third party”. As was seen most notably in the hacking of the Mt Gox exchange, when half a billion dollars’ worth of Bitcoins just disappeared, owning Bitcoin is not necessarily risk-free.
|FTSE 100 Weekly Winners|
|Royal Bank of Scotland Group||3.0%|
|Marks and Spencer Group||2.9%|
|Lloyds Banking Group||2.4%|
|FTSE 100 Weekly Losers|
|Randgold Resources Limited||-7.1%|
|Wm Morrison Supermarkets||-6.9%|
If there is one guarantor of speculative mania, it is the Fear Of Missing Out, and this is stoked by “clickbait” advertising on otherwise respectable websites. I spotted one with the attention-grabbing headline “Kid from Luton becomes a millionaire after buying Bitcoin”, so clicked through to find no mention of the lucky lad, but plenty of other exhortations to buy Bitcoin which led (very conveniently) to a website where you could unload your hard-earned pounds and buy some Bitcoin! Given the UK consumer’s propensity for on-line shopping, why not stick a few Bitcoin in the cart?
Having spent all this time debunking Bitcoin, I can see why people might want to buy some as an option against the tail-risk of cryptocurrencies becoming the norm – even if governments, central banks and banks are going to fight it tooth and nail. A misdirected nuke from Kim Jong-un could be the catalyst. But it is certainly not an asset class in its own right as some of the more over-excited supporters claim. We have no current intention of adding it to client portfolios, but it is up to the individual to decide what to do on their own account. It is inevitable that we will hear more stories about people who have made a fortune, just as one hears of people who bought Apple or Amazon for peanuts. Do you feel visceral regret at having missed those opportunities, and would you have bet the farm on them? I think not. Finally, the French Blue, which went missing on 11th September 1792, was a diamond. This week, Rembrandt’s painting Militia Company of District II under the Command of Captain Frans Banninck Cocq is better known by what name?
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