Written by: Jordan Chan
In recent months it is likely you’ll have encountered topical discussions on Bitcoin and cryptocurrencies. Indeed, in the past year it has seen ‘meteoric rises’ from roughly $5000 per Bitcoin in March 2020 to an all-time high of $40,000 in early 2021. In the first 3 days of January alone Bitcoin gained 17%. Proponents of the cryptocurrency, such as Chainlink’s founder Sergey Nazarov, believes that its price could eventually reach upwards of $100,000 (£73,000). The recent success was not just limited to Bitcoin, with other cryptocurrencies also subject to huge upswings, such as the 600% gain of Ethereum from 2020-2021.
Therefore, it is no surprise that this new contentious asset class has attracted much attention. Nigel Green, CEO of deVere Group outlined his unwavering confidence in the Bitcoin, arguing that “’We believe this cryptocurrency is the future of money. The staggering pace of the digitalisation of our lives, with increased use of computers and online trading, means digital money is here to stay.” Yet on the other hand, staunch sceptics such as economist Nouriel Roubini labelled is as nothing more than a “pure speculative asset and bubble with no fundamental value.”
This article will attempt to lay out the fundamentals of Bitcoin as a cryptocurrency, and also articulate reasons, very much linked to the uncertainty surrounding the pandemic and presidential handover, for its recent astronomical and unprecedented rise.
What is Bitcoin?
Bitcoin is a cryptocurrency, which means that it is essentially a digital currency that it is not tangible. While hundreds of cryptocurrencies are currently active today, Bitcoin is the most widely used, hence the closest cryptocurrency equivalent to traditional fiat currency.
A Bitcoin can be divided into fractional portions, with its smallest portion termed a satoshi, (named after its illusive Japanese coding founder Satoshi Nakamoto) a unit equivalent to 0.00000001 Bitcoin. Since the supply of Bitcoin in circulation is limited to 21 million, Bitcoin cannot be devalued in the same way that quantitative easing via central banks does. Therefore, in this regard, Bitcoin’s finite supply renders it more in common with gold than with the US dollar.
As such, it has led particularly bullish investors to interpret this asset class as an alternative ‘safe haven in times of crisis’, one such factor which undoubtedly contributed to its hike in price. Since uncertainty around the capital markets remained due to the second Covid strain, continued travel restrictions and lockdowns, along with the political instability in USA, prices of traditional safe havens such as gold rose from $48,000/kg in March 2020 to $62,450 at the start of 2021. As such, this also led to an increased interest in Bitcoin as investors rallied to diversify their assets.
In recent months, a significant catalyst for the hike in price was the investment by sophisticated institutional investors such as Ruffer, who had accumulated £550m of Bitcoin since November, which accounts for 2.7% of their AUM. As stated in the FT this signalled a major trend of large investors diversifying their portfolios via Bitcoin. Similarly, due to the illiquid and volatile nature of the cryptocurrency, hedge funds have also used it to hedge against inflation and perceived civil unrest, particularly after Trump’s unwillingness to concede the election. Because of the moves made by these prominent investors such as Stanley Druckenmiller, many retail investors have chosen to follow suit and invest surplus capital from stimulus payments into the asset class, further contributing to the hike in price.
Each Bitcoin is a coded digital file which is stored in a cloud-based digital wallet app or on a computer or smartphone. Through these wallets, people can send Bitcoins to and from other wallets in exchange for goods and services, in the same way that cash is handled.
Although wallets claim to protect against the theft of Bitcoins, they can be vulnerable to hacking, especially wallets used on Bitcoin exchanges and online marketplaces. An example of this is the infamous hacking of the Mt Gox exchange, also known as ‘Bitcoin’s Biggest Heist’. In 2013 this exchange handled 75% of all worldwide Bitcoin activity/transactions, however by February 2014, it had filed for bankruptcy, losing approximately 740,000 Bitcoins which belonged its worldwide client base.
Every Bitcoin transaction is recorded in a blockchain, which is a public ledger of all prior Bitcoin transactions stored in groups known as blocks. Hence this means that it is possible to trace the history of Bitcoins, preventing people from spending coins they don’t own, or making copies of various transactions. Since Bitcoins utilise an open source system, any developer can review and access the software code, allowing them to mine new cryptocurrencies.
The prevalence of cryptocurrencies and the blockchain underpinning it will no doubt spike interest from law firms, many of whom are already investing heavily into the field. Law firms will not only be expected to guide clients through this technology, but also establish new legal frameworks and regulations. Furthermore, the practical legal applications for blockchain remain relevant, potentially disrupting traditional service firms and their business models. Check out our article explaining blockchain in more detail.
Since the mining and exchange of Bitcoins is not controlled by the government or central banks, it has no central authority. Therefore, this may be advantageous in that it gives the user the ability to move capital about without a financial institution acting as an intermediary, which can cut out additional charges from banks and card providers. Essentially, it allows for a much more convenient carrier of capital, especially regarding cross-border transactions.
Furthermore, its decentralised nature means that it retains independence from political crises and influence. This means that whilst the performance of traditional capital markets is correlated to political activity, Bitcoin bucks this trend, allowing it to operate with more freedom.
So why else have crypto markets performed well?
Alongside the contentious idea of Bitcoin being a safe haven to offset current uncertainty in the markets, recent headlines have demonstrated that Bitcoin itself is increasingly becoming more accepted and arguably mainstream as a form of digital payment. Although this anonymous method of exchange has previously attracted money-launderers and criminals, an increasing number of retailers are beginning to accept Bitcoin as payment as it reflects a more accessible, convenient method for some shoppers.
Indeed, along the high street, the cosmetics brand Lush, Brewdog pubs and Starbucks cafes among others have joined the likes of Expedia, Microsoft, and Steam to adopt this uptake. By doing this, the aim is to “allow payment in a decentralised currency that is unaffected by the global foreign exchange fluctuations, meaning that customers from all over the world all pay the same for a product. Therefore, the increasingly embedded nature of this cryptocurrency as part of our daily payment systems gives investors greater confidence to capitalise on this trend.
This phenomenon of Bitcoin slowly moving into the mainstream can be seen most evidently in two recent developments that demonstrate the increasing confidence surrounding the cryptocurrency: PayPal’s decision to follow Revolut and enter the cryptocurrency market, and Coinbase filing for a landmark IPO.
Firstly, by allowing customers to buy and sell Bitcoin via their accounts, PayPal have opened the cryptocurrency floodgates to its 300 million users, which include 26 million retailers. In doing so, there is projected to be a surge in uptake of the currency, given the added ease and convenience of usage. This move, alongside the pandemic, contributed to PayPal’s strong year of growth, as shares grew from $110 USD in January 2020 to new highs of $244 USD 12 months later.
Furthermore, the recent Coinbase IPO filing with the SEC is indicative of the attractiveness, viability, and increasing popularity of Bitcoin as a mainstream mode of exchange. Indeed, its valuation is projected to reach upwards of $28 billion. Hence, listing the “largest regulated exchange in the world” on the capital markets gives the cryptocurrency an additional layer of legitimacy. This would no doubt fuel investor confidence and further highlight its appeal.
When combined with the fact that many retail investors are investing their $600 stimulus payments into the cryptocurrency, it is clear that
Hence a quick glance at the resilient performance of cryptocurrencies suggests that it is slowly but surely being integrated into the mainstream financial and legal organism. Its convenience, decentralised nature, and built-in scarcity has combined with the political and economic instability caused by the pandemic and contested election results to demonstrate that its acceptance is becoming increasingly widespread.
This is seen by the fact that large retailers and intermediaries are readily adopting this technology, while astute institutional and retail investors are also seeing opportunities. This is further symbolised by the IPO of Coinbase, which many see as a fundamental legitimising catalyst in ultimately reaching a cashless society.