I’m not here to tell you not to buy bitcoin, nor am I here to tell you to buy bitcoin. What I will tell you is that, believer or not, bitcoin is quite obviously here to stay, so it’s worth taking the time at least to understand how it fits into global capital markets.
I was ridiculed by some colleagues in 2018 by continuing to insist we should advise our financial services clients on bitcoin and other crypto-assets even after the dramatic price drop over that year, in which bitcoin lost 80% of its value. And lo, one of our former investment bank clients, a huge US bank, announced last week it was moving firmly into custody of digital assets.
So far, so humdrum. Now that Tesla has invested $1.5bn in bitcoin even Mohamed el-Erian is writing about bitcoin daily. But it was not too long ago when so many people were sceptical and dismissed it for crooks, geeks and hobbyists.
Even during the then so-called “crypto winter” I continued to tell people this was an important development, I continued to support the events and companies of my crypto buddies in London.
We were all confident then that the crypto spring was shortly on its way, and recent developments have proved us right. But that is not to say that crypto is not without its problems.
Bitcoin’s extreme volatility is often cited as a reason not to invest, but this is a nascent asset class, and as such its volatility is understandable. However, with speculative alternative investments such as these you probably shouldn’t be playing with the house money anyway — you should only invest with what you can afford to lose.
If you believe fiat money is real or well-governed, you clearly haven’t thought through quantitative easing properly or spoken to any Zimbabweans and Argentinians lately.
Indeed, on seeing the unprecedented flows into and returns from the asset class, the UK Financial Conduct Authority (FCA) issued a warning to investors on January 11 2021 that they could lose some or all of their money investing in bitcoin. The FCA is concerned that consumers may not be protected from money laundering given the incomplete regulatory framework for crypto-assets; the price volatility puts consumers at risk of extreme losses; the complexity of the products, particularly with crypto-derivatives, make it difficult for consumers to fully understand the risks; and there may be liquidity issues when trying to convert crypto back to cash.
Yet, while the regulator is right to defend consumers and market integrity, the asset class is undoubtedly professionalising. Bloomberg hosted an event with crypto hedge fund CoinShares in 2019; $9-trillion asset manager BlackRock has started dabbling in crypto; Jack Dorsey has also taken sizable bitcoin positions at Twitter and Square; and Xapo offers custody for your crypto keys in Swiss mountain vaults.
It is also slowly becoming a more generally accepted means of payment, and companies such as PayPal allowing for payment in bitcoins and altcoins will only accelerate this. The potential for bitcoin in Africa is particularly good, with 60% of the world’s mobile money already passing through the continent and Nigeria being the world’s second-largest bitcoin market after the US.
So what happens now? The next frontier for crypto is central bank digital currencies. Sovereigns are already positioning to create digital fiat as crypto begins to challenge bank-issued currency. In fact, crypto does particularly well in those countries with macro headwinds.
This is the point — in economics there has long been the concept of “money illusion”. If you believe fiat money is real or well-governed, you clearly haven’t thought through quantitative easing properly or spoken to any Zimbabweans and Argentinians lately.
Some magic internet blockchain money may just give central banks the challenge they need to start thinking about ways in which they could make money as a public good more efficient.
• Dr Desné Masie, a former senior editor of the Financial Mail, is chief strategist at IC Publications in London and a fellow of the Wits School of Governance.
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