Bitcoin: Virtual money, unreal returns
SA investors are showing greater interest in the digital currency after its 120% return, which made it the year’s best asset class
A little more than three years ago the idea of buying into Bitcoin for investment purposes was akin to saying one wanted to purchase a unicorn. Ludicrous. But anyone who dared believe in the unthinkable then is reaping the rewards now.
Bitcoin could prove to be a lucrative alternative asset class for the riskier investor. For the second year in a row it ended last year as the best-performing currency in the world.
On January 1 2016 the average price of one bitcoin was R7,307. One year later it had risen to R14,443. It has since retracted and is now trading at about R13,500.
An investment in the JSE’s all share index in 2016 would have yielded a flat return. One in the S&P and in gold would have produced a return of about 9%. And yet Bitcoin managed a return of 120%.
Luno, the oldest and largest bitcoin exchange in Africa, says there has been a rise in the number of local customers buying bitcoin, as well as a rise in bitcoin-rand trading volumes and in the usage of the currency as a payment method.
Yet bitcoin is used mostly as storage for wealth, says Luno head of marketing Werner van Rooyen. "This is because of its strong performance against other currencies over the past few years and due to some of its unique characteristics."
Bitcoin exists only in digital form, not in coins or notes. It is decentralised — meaning that there is no single business, government or entity that owns or controls it.
"Bitcoin is a little bit like the Internet. It’s a modern technology, with a lot of current use cases and future potential. It’s a network that isn’t owned by any single entity, and it is built on open protocols. Anyone can participate and build things on top of it," says Van Rooyen.
A research paper by ARK Invest and Coinbase says bitcoin trading volumes reached roughly US$1bn/day in the first quarter of 2016. "Bitcoin exhibits characteristics of a unique asset class — meeting the bar of investability, and differing substantially from other assets in terms of its politico-economic profile, price independence, and risk-reward characteristics," the researchers argue.
In its short life, bitcoin has provided investors with stellar absolute returns, above and beyond that of any other asset class. If one had invested $10,000 in bitcoin four years ago, it would now be worth nearly $1m and would have outperformed the other broad asset classes 56-fold to 212-fold, the paper says.
Van Rooyen says that for a number of reasons the adoption of bitcoin in expected to accelerate. These include the launch of bitcoin ETFs, increased institutional participation and further softening of global financial markets.
"There are already a number of ETFs in the pipeline. Physical gold ETFs did wonders for the price of gold by opening it up to new sources of liquidity.
"In terms of institutional participation, some hedge funds are already publicly taking large positions in bitcoin, and we’ve also had a huge uptick in inquiries from many quarters, including hedge funds, private wealth managers and other financial institutions.
"The ‘real’ money hasn’t even begun to start playing in this space, and it is poised to happen," says Van Rooyen.