Should the investment universe in SA include Bitcoin?

The combination of cheap debt and scarcity are driving prices of selected traditional asset classes to record territory and could help to supercharge speculative assets such as Bitcoin over the next decade.

This is the view of Dominic Frisby, a leading UK financial journalist, who spoke at the Allan Gray Investment Summit. This virtual event brought together local and international investment managers and other finance experts to share their perspectives on how to make sense of the current environment and invest for the future.

What’s driving the value of Bitcoin?

According to Frisby, who authored one of the first books on Bitcoin, the scalability of digital goods and services has resulted in the digital or intangible economy outstripping the physical economy by some margin.

“In 1990, the market cap of the three biggest companies in Detroit was US$36 billion; today, the market cap of Facebook, Apple and Alphabet is US$4.7 trillion, or 130x higher in 30 years,” he said. This staggering growth is almost entirely due to the scalability and replicability of digital.

Yet, Bitcoin leaves these tech giants in the dust. The price of the cryptocurrency has increased 50 million times since it first traded at around 1000 BTC per US dollar, to trade closer to US$50 000,00 per BTC recently.

“Bitcoin has created digital scarcity,” said Frisby. “It offers finite supply; it is a new system of money; it has a transparent inflation rate; and governments cannot print it… It can be seen as a type of digital store of energy.”

However, Thalia Petousis, fund manager at Allan Gray, feels that perhaps the value in Bitcoin has not been in its limited supply or digital scarcity or even the token itself, but rather in the technology it uses and the blockchain.

“The distributed ledger technology that Bitcoin is couched in solves a very complex computer science problem of how to link up transactions in a potentially untrustworthy network. The answer is in making a digital record of transactions in a different place – a type of a digital cloud, which has both an element of security and privacy,” said Petousis. “Many assets are scarce, but this does not imbue them with boundless value. What is concerning is the lack of a technology conversation taking place in the media with regards to cryptocurrencies and the uses of the blockchain.”

Fiscal responses, debt and inflation

“Developed market debt is extraordinarily cheap at present,” said Frisby. The US is awash with dollars thanks to its fiscal policy responses to the Covid-19 pandemic and is now sitting on a US$30 trillion debt pile.

Frisby unpacked the UK price inflation statistics over a five-decade period, starting 1971. The data showed that assets and goods that achieved double-digit price multiples were fuelled by cheap debt and scarcity of supply. In contrast, the prices of low inflation goods were kept in check by productivity gains.

“The best investments in a world of inflation and money printing can be found in asset classes that are dominated by debt and fixed supply,” said Frisby, before commenting on the fruitlessness of holding cash.

“The US dollar has been a terrible investment since 1976 while the South African rand has lost around 90% of its purchasing power over a similar period,” he said. Fiat money, which is a government-issued currency that is not backed by a commodity such as gold and that should retain its purchasing power over time, has been ‘undone’ by the removal of the gold standard and expansionary monetary policy, among other factors.

The million-dollar question is whether Bitcoin, which many refer to as digital gold, will behave similar to the precious metal in response to inflation.

Should asset managers be allowed to hold Bitcoin?

Frisby said that digital currencies were not designed to be stored by asset managers on behalf of clients. They introduced storage and transactional complexities and exposed asset managers a range of custodial and regulatory risks.

“As beautiful a creation that Bitcoin might be, I am not entirely sure it is something that asset managers should be holding on behalf of their clients,” said Frisby.

Petousis believes that holding Bitcoin in today’s environment could be likened to gambling, and that private investors should only put the capital at risk in cryptocurrencies that they are theoretically happy to lose.

“As an asset manager, we don’t have any reasonable valuation anchors to say exactly what the cryptocurrency is worth. There are no fundamentals that we can assess,” she said. “Gold at the very least has functioned as a tested safe-haven asset over time.”

In South Africa regulations do not at present allow for asset managers to invest in Bitcoin on behalf of clients, however, Petousis cautions that investors who want exposure to the cryptocurrency and invest on their own, must be aware of the risks, which include extreme volatility and capital loss.

“Investors must keep in mind that the platforms on which cryptocurrencies are available are often lightyears behind the reporting requirements required by traditional banks, which could leave them open to unscrupulous activity,” she said, adding that asset bubbles have traditionally been marked by mania and fraud.

But are clients missing out on attractive opportunities presented by the Bitcoin universe?

“FOMO, or the fear of missing out, can cause an investor to over rationalise or over justify the reason for wanting to own something, but this can be a signal that something doesn’t have real value,” concluded Petousis.

To watch Frisby’s presentation on Bitcoin from the Allan Gray Investment Summit, as well as a range of other thought provoking content by local and international speakers aimed at helping investors make sense of the current environment, click here: https://www.investmentsummit.co.za/?video=JK3nj2RuhBo