Among the cryptocurrencies that have emerged over the past decade, few have managed to become as prominent as Bitcoin. The original cryptocurrency continues to dominate the space, despite newer innovations such as Ether and so-called ‘meme coin’ Dogecoin.
In 2021, interest in Bitcoin soared as the global economy opened following the covid-19 pandemic, pushing valuations higher, hitting $67,566.83 (£56,480.3, €65,311.4) on 8 November.
But rising inflation and greater geopolitical and economic uncertainty have seen the cryptocurrency’s valuation fall over the past 12 months.
In the year to 23 November, Bitcoin has fallen by 71.4% to $16,465.
But with many cryptocurrencies now trading at considerable discounts compared with one year ago, could an opportunity be opening up for UK retail investors?
Real value emerging as sugar rush fades
Current valuations and the appeal of an asset class with less correlation to poorly performing stock markets might offer an attractive entry point for some investors.
Bitcoin and other cryptocurrencies are widely regarded as the ‘future of money’, said Nigel Green, chief executive and founder of DeVere Group, with investors drawn by the inherent and future value of “digital, borderless, global, tamper-proof, unconfiscatable currencies”.
As a cryptocurrency investor, Green said he has been buying the dips “embracing short-term volatility for longer-term gains”.
“It is worth remembering that despite coming down [over] 50% from its hype and heat-fuelled November high, Bitcoin remains the best-performing asset class of the decade,” he said. “And as the sugar rush of free money fades away, we can see the real value of assets.”
While valuations may not rise as quickly as last year, investors should expect “a less high-octane, more steady, continued upward trajectory for Bitcoin and other cryptocurrencies” in the next few months, Green added.
Extreme and uncertain outcomes
But Bitcoin and other cryptocurrencies remain a polarising asset class among the financial adviser community.
They were recently described as “portfolio kryptonite” by global asset manager PGIM, which claimed cryptocurrencies do not possess three key attributes of an investable asset class, including: a clear regulatory framework, acting as a store of value, and a predictable correlation with other asset classes.
Laith Khalaf, head of investment analysis at investment platform AJ Bell, said the fall in the value of Bitcoin over the past year is unlikely to have made it a more attractive investment, describing it as “more speculation than investing”.
“Most people who have invested in Bitcoin in the last three or four years have done so with a small amount of money as a bit of a punt. And I think that is precisely the way to do it. It should not have any place in a retail investor’s strategy.”
Khalaf added that it remains to be seen what long-term role Bitcoin and other cryptocurrencies will play in the future.
“It is entirely possible that it could become a functioning part of our monetary system, although I find that unlikely. Equally, it could be proved entirely worthless,” he explained. “So, the outcomes that you can get from Bitcoin are quite extreme and extremely uncertain.”
Gavin Haynes, co-founder of investment consultancy Fairview Investing, said getting exposure to cryptocurrencies in a regulated environment is difficult for UK retail investors, although the FCA is looking to expand its expertise in the area.
Regulatory challenges notwithstanding, Haynes believes Bitcoin remains a highly speculative investment.
“One year after the world’s first ETF-tracking Bitcoin [ProShares Bitcoin Strategy ETF] was launched, it has lost investors more money than any other ETF. Twelve months down the line, it has lost 70% or so,” says Haynes. “In a challenging environment with high risk aversion, it might take some time for investors to gain an appetite for more speculative areas.”
Picking the right coin
Nevertheless, the hype around Bitcoin and other cryptocurrencies is likely to remain as they weather the post-covid economic downturn. Indeed, even though Bitcoin has more than halved, it is still worth thousands of dollars.
Although deciding how much of their portfolio to invest in cryptocurrencies will be one of the most important steps for investors, DeVere Group’s Green said thinking strategically will play a huge role in understanding the risks involved with the coins.
“It is generally better to do your own research on the types of cryptocurrencies; understand how they work and their history, before deciding on which to participate in,” he added.
“Things you should be looking at are the purpose of the cryptocurrency, how long it has been in the market, market capitalisation and its underlying solutions.
“Cryptocurrencies that solve problems are likely to succeed more than those that do not. The longer a cryptocurrency has been in the market, the more trust it has attained, and cryptocurrencies that are developed on strong networks will stand higher in value.”
This article first appeared on our sister publication Portfolio Adviser.
