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Musings of a crypto theorist – where theory meets reality

Nigel Feetham KC
Partner, Head of Financial Services

A year ago I wrote an article where I postulated that I didn’t see Bitcoin (or other crypto-assets for that matter) becoming mainstream currencies any time soon, but this didn’t prevent me from buying.

Whilst I am not heavily invested in crypto, I did buy (fractional shares), primarily because I thought it would be the best way to try to learn. It was never euphoria (“Fools Gold”) but I never thought I was buying “Digital Gold” either. Instead, with virtually zero-interest rates on cash deposits, I considered I could afford to also take a small risk.

What did I learn? 

(a) The current price of major crypto-assets are significantly below the high levels we saw a year ago. Certainly, I cannot remember a market consensus that we would see these current lows. If anything the opposite was true. Admittedly, there has been major turmoil caused by a number of events, including the bankruptcy of FTX (among others).

Lesson 1: Don’t try to predict what the crypto market will do or when it will turn. If you believe Bitcoin is an asset class like any other (albeit highly volatile), then accept its value can go up or down but also that you are not buying equity or debt and therefore you are not receiving dividends or interest to compensate for the volatility.

(b) There were two points in time when I considered selling my holding and I would have doubled my original investment. Since then I have watched the free fall this year and obviously I now appreciate that’s exactly what I should have done. I stayed invested because I could afford to lose the entire original amount. I repeat, it wasn’t substantial.

Lesson 2: Don’t pay undue attention to market noise that the value of Bitcoin (and other major crypto-assets) will continue to hit new highs. Get out when you think you should, based on your own personal circumstances.

(c) When I bought I heard people say it was not correlated to equities (so could, for example, help reduce volatility in an equity portfolio) and was also a good hedge against inflation (before the inflationary pressures of the last months, that is). But it hasn’t worked out that way. Bitcoin has been correlated with equities recently and has now declined as interest rates go up and institutional investors exit. Nor was it a hedge against inflation, as we now know.

Lesson 3: There is no intrinsic value or fundamentals because there is no underlying asset like gold or a currency backed by a central bank. The value can certainly go up but you can potentially also lose everything just as quickly. Every time I saw prices increase, that’s when it was most tempting to buy because you tend to see only the upside. Of course, in every market place prices move according to supply and demand and here movement in prices can be influenced by large positions being taken by a fairly small number of crypto players, creating an expectation of a further upwards trend; that is, until external money (retail investors especially) stop chasing the increase in price and they begin to drop. It doesn’t look like much of a science, or is it?

(d) I am now virtually down to a fraction of the original amounts invested. But I am a long-term holder and the amounts were relatively small.

Lesson 4: Unless Bitcoin hits a major low I expect to be watching from the side-lines before I consider buying again any time soon.

Or maybe that sounds like gambling? If it does, I don’t gamble, except for having placed a very small bet or two when I was a young man in the Grand National for family fun! I would therefore rather call it speculative (but controlled) investing.

So I guess the answer to my original question (‘what did I learn?’) is that I learnt nothing that, with hindsight, I shouldn’t have known already.

Or put another way, ‘caveat emptor’ (buyer beware).

I do think, however, that Bitcoin is here to stay and its value may never drop to zero whilst there is a multi-billion dollar industry built on or around it. Predicting where Bitcoin (and other major crypto-assets) goes from here is another matter. That’s impossible to do but I do still think that regulation globally will happen and that institutional money (and perhaps governments too through the adoption of central bank digital currencies) will eventually take control of a large part of this space. And that can only be a good outcome – at least that is my own personal view.

Please note nothing stated here is an investment recommendation of any kind.


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