Bitcoin: an investor's guide

 Bitcoin: an investor's guide

Bitcoin - the original cryptocurrency launched in 2009 - has been on a roller coaster ride over the past few years, according to David Lersh, senior investment analyst at Sanlam.

After Bitcoin plunged below $ 5,000 last March, Bitcoin surpassed $ 52,000 on February 17 after increasing publicity following Elon Musk's tweet that his car firm Tesla had bought about $ 1.5 billion in digital currency.

Digital gold

It is perhaps best to think of it as a form of digital gold. Bitcoin shares some key characteristics with gold: it is untraceable, divisible almost endlessly, rare, and not controlled by governments.

Like gold, Bitcoin does not pay dividends or interest, and you do not receive interest on your assets.

The difference is that there is a clear finite number of bitcoins that will ever appear: 21 million. After that, you can no longer create. Currently, about 18.6 million bitcoins have been mined, or 89% of the total.

Cycles of greed and fear

A key step towards the broader investment appeal of bitcoin and other cryptocurrencies will be price stability that has not been evident to date. In our opinion, several more cycles of greed and fear will be needed before the price of bitcoin stabilizes.

Right now, Bitcoin is more of a speculation tool than a transaction currency. If you buy something with Bitcoin, the person you are paying to has no idea how much it will cost the next day. In our opinion, this instability limits its viability as an everyday currency.

With any limited commodity, human ingenuity finds a substitute when prices rise or supply fails to meet demand.

New asset class?

However, we should not reject cryptocurrencies as an asset class. The story is too short to draw correct conclusions about bitcoin's role in portfolio diversification, as gold offers diversification, usually negatively correlating with stock prices.

If they became an asset class in their own right, and if they made up, say, 1% of a standard multi-asset portfolio, then cryptocurrencies could move to a market cap of over $ 1.5 trillion, higher than their current ~ $ 1.1 trillion. Such a situation could justify a bitcoin price of about $ 65,000 in the future.

We are seeing a rise in institutional interest in bitcoin every year, which is a sign that the technology is growing and gaining more acceptance. Among the issues of concern is whether the rules in the source code are really unbreakable.

Where to trade

There are many coin exchanges around the world, but Luno is the largest in South Africa. It is owned by Naspers, which provides the participants with a certain amount of comfort. Coinbase is widely regarded as the best platform for trading your cryptocurrencies around the world.

Generally, world prices are better than South Africa and fees are lower. Trading costs usually amount to ~ 1.5% of the deposit amount and another 1.5% for return in regular cash. Although trading commissions are small, they are usually hidden by a ~ 0.5% spread between bids and offers.