I know you didn’t sign up for Peter on Property to read about cryptocurrencies… but please, just this once, hear me out.
As a veteran financial market and real estate investor, I was extremely sceptical about digital currencies when I first came across them a few years ago.
Any article you read about bitcoin had the words “bubble” or “black market” in it.
And a lot of investors are still wary of cryptocurrencies today… particularly, I’ve found, those who focus on hard assets like real estate and gold, and those who have come of age investing in stocks.
But the more I’ve learned about cryptocurrencies, the more I’ve put my concerns behind me.
And rest assured, it is a learning process. Simply put: I truly believe cryptocurrencies and the technology behind them will change our lives over the next five to ten years.
That’s why now is the time for everyone – even old-school bricks-and-mortar investors like me – to own a little bit of bitcoin and learn about cryptocurrencies.
People still don’t get bitcoin
As an asset class, I categorise bitcoin as similar to U.S. dollars, sterling, yen or any other currency. It is a form of currency. And as such, it should be looked at as something between say, dollars and gold.
Due to bitcoin’s scarcity (i.e. limited supply) and the inability of anyone to “print” more of it, it clearly has a lot of similarities with gold. Likewise, it does not give you an interest rate as currencies do, so it’s similar to gold in that respect.
The other important thing to remember about bitcoin is that it’s not actually controlled by any central organization – the Federal Reserve, the Treasury, the Bank of England or the European Central Bank.
There’s no company, there is no CEO, there is no chief financial officer. I think there’s every reason to believe that the importance of cryptocurrencies will grow over time simply because it is something that is not controlled by governments.
I read last week how Axel Weber, the Chairman of Swiss Investment Bank UBS and former Bundesbank President, expressed his scepticism over bitcoin. It made me chuckle to hear him say “I get often asked why I‘m so sceptical about bitcoin, it probably comes from my background as a central banker.”
That’s the whole point Axel! You can’t keep printing bitcoin like you can euros!
And as I said earlier, bitcoin is limited in terms of the amount that can be put into circulation. So it has a scarcity value, which does not occur with U.S. dollars where the Fed can just keep pouring U.S. dollars into the global economy.
With bitcoin there is a limit on how much can be put into the system. So there is automatically a scarcity value that is going to be created.
Bitcoin is becoming more mainstream… but there’s still upside
While bitcoin may still be misunderstood by most, it’s quickly becoming a topic in regular day-to-day conversations.
The favourite topics of dinner party conversations in Hong Kong and around the world have always been about property prices and airline travel. But I now see bitcoin and cryptocurrencies becoming part of the dinner party conversation.
But still, even people who are very financially literate, who have been in investment for many years, who are very up to speed with that’s going on in the world, have very little information or understanding of what these cryptocurrencies are. So although bitcoin is increasingly cropping up in conversation, very few of these people own any bitcoin.
That suggests to me that despite this big recent bull phase, there’s a lot of runway ahead of us in terms of upside.
Bitcoin will change the world as we know it
Bitcoin and other cryptocurrencies at this point are little more than a proof of concept of the technology behind them – the blockchain, or distributed ledger technology. Distributed ledger technology is going to be applied across all facets of life and business. For example, just about every major bank and central bank in the world is looking at applications of distributed ledger technology in finance.
To me, cryptocurrencies are important, but what’s perhaps most important and will be earth shattering over the next five to ten years is how we’re going to apply blockchain to every single part of our businesses and livelihoods going forward. That is the real key part of cryptocurrencies.
And as we go forward, I think we’re going to see huge numbers of middle-aged and older people start to adopt bitcoin and other cryptocurrencies as the barriers to buying it keep falling.
Think about it right now… the total value of bitcoin in circulation today is around US$70 billion.
Sounds like a lot? Well, by comparison, Apple has three times that amount of money in cash on its balance sheet… that’s just one company! And we’re talking about the possibility of bitcoin becoming a global digital reserve currency in future.
I envisage that in the next few years we could easily see the entire cryptocurrency market valuation hit a trillion U.S. dollars.
Is this a given? Of course not. But putting a little bit of your capital into bitcoin and other cryptocurrencies is an asymmetric bet – risk a little, for a potentially massive return.
Everyone should own bitcoin
I would suggest that people at least pack a very small amount of their investable assets into cryptocurrencies, mainly bitcoin, as it’s the longest running and most established. But be aware that this is a speculative investment, it’s going to be extremely volatile in the short term.