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Should asset managers own Bitcoin on behalf of clients

Should asset managers own Bitcoin on behalf of clients?

Holding Bitcoin is akin to gambling, and private investors should only risk capital in cryptocurrencies that they are theoretically happy to lose, Allan Gray fund manager Thalia Petousis told the asset manager’s recent Investment Summit.

“As an asset manager, we don’t have any reasonable valuation anchors to say exactly what the cryptocurrency is worth. There are no fundamentals that we can assess,” she said. “Gold at the very least has functioned as a tested safe-haven asset over time.”

In South Africa, regulations do not currently allow asset managers to invest in Bitcoin on behalf of clients.

Investors who want exposure to the cryptocurrency and invest on their own must be aware of the risks, which include extreme volatility and capital loss, Petousis said.

“Investors must keep in mind that the platforms on which cryptocurrencies are available are often light years behind the reporting requirements required by traditional banks, which could leave them open to unscrupulous activity.”

Dominic Frisby, a leading UK financial journalist, told the summit that digital currencies were not designed to be stored by asset managers on behalf of clients. They introduced storage and transactional complexities and exposed asset managers to a range of custodial and regulatory risks.

“As beautiful a creation that Bitcoin might be, I am not entirely sure it is something that asset managers should be holding on behalf of their clients,” said Frisby, who wrote one of the first books on the cryptocurrency, Bitcoin: The future of money?, published in 2014.

What’s driving the value of Bitcoin?

He said the combination of cheap debt and scarcity were driving the prices of selected traditional asset classes to record territory and could help to supercharge speculative assets such as Bitcoin over the next decade.

According to Frisby, the scalability of digital goods and services has resulted in the digital or intangible economy outstripping the physical economy by some margin.

“In 1990, the market cap of the three biggest companies in Detroit was $36 billion; today, the market cap of Facebook, Apple and Alphabet is $4.7 trillion, or 130 times higher in 30 years,” he said. This staggering growth is almost entirely due to the scalability and replicability of digital.

But Bitcoin leaves these tech giants in the dust. The price of the cryptocurrency has increased 50 million times since it first traded at about 1 000 BTC per US dollar, to trade closer to $50 000 per BTC recently.

“Bitcoin has created digital scarcity,” said Frisby. “It offers finite supply; it is a new system of money; it has a transparent inflation rate; and governments cannot print it … It can be seen as a type of digital store of energy.”

However, Petousis feels that perhaps the value in Bitcoin has not been in its limited supply or digital scarcity or even the token itself, but rather in the technology it uses and the blockchain.

“The distributed ledger technology that Bitcoin is couched in solves a very complex computer science problem of how to link up transactions in a potentially untrustworthy network. The answer is in making a digital record of transactions in a different place – a type of a digital cloud, which has both an element of security and privacy,” said Petousis.

“Many assets are scarce, but this does not imbue them with boundless value.”

Fiscal responses, debt and inflation

“Developed-market debt is extraordinarily cheap at present,” said Frisby. The US is awash with dollars thanks to its fiscal policy responses to the Covid-19 pandemic and is now sitting on a $30 trillion debt pile.

Frisby said an analysis of UK price inflation data over five decades, starting 1971, showed that assets and goods that achieved double-digit price multiples were fuelled by cheap debt and scarcity of supply. In contrast, the prices of low-inflation goods were kept in check by productivity gains.

“The best investments in a world of inflation and money printing can be found in asset classes that are dominated by debt and fixed supply,” said Frisby

He said holding cash was a losing proposition.

“The US dollar has been a terrible investment since 1976, while the South African rand has lost around 90% of its purchasing power over a similar period.”

Fiat money, which is a government-issued currency that is not backed by a commodity such as gold and that should retain its purchasing power over time, has been undone by the removal of the gold standard and expansionary monetary policy, among other factors.

The million-dollar question is whether Bitcoin, which many refer to as digital gold, will behave in a similar way to the precious metal in response to inflation.

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