While Howland Capital is not currently recommending clients have exposure to cryptocurrencies, we are intrigued...Feb 2021
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Key background information on Bitcoin
Bitcoin is a virtual, digital currency (“cryptocurrency”) invented in 2008 by an unknown person or group (under the alias of Satoshi Nakamoto). Supply is fixed at 21 million “coins” that can be sent from one owner to another without central bank or single administrator involvement. Bitcoin transactions are recorded and kept on a transparent, decentralized, and peer-to-peer network, which was developed and is available to all via open-source software. “Blockchain” is the technology underpinning the distributed ledger where all bitcoin transactions are recorded. Bitcoin is the largest cryptocurrency, as measured by the dollar value in circulation, of many types of cryptocurrencies developed using blockchain technology.
Howland Capital’s current thoughts on Bitcoin
We are intrigued by Bitcoin, the concepts behind cryptocurrencies, and the opportunities that blockchain technologies may present. However, too much remains unknown and there are a number of current dynamics in the space that leave us too hesitant to endorse adding exposure to our clients’ portfolios.
What we like about Bitcoin:
- Widespread adoption, with a lot more to come. While still relatively new, the evidence suggests cryptocurrencies are not a fad. Widespread adoption is already occurring, and we expect the pace to accelerate from here. Many large financial as well as non-financial institutions are studying crypto, developing offerings, and building infrastructure around the use of the underlying technology. What we have seen is only the beginning of what could turn out to be a new paradigm in the global currency landscape driven by technology.
- Inflation risks on the horizon. In a world of seemingly unending fiscal stimulus and money printing (i.e. currency debasement), we are mindful of the potential for accelerating inflation in the coming years. This is one reason we favor owning gold, not to mention equities, in our clients’ portfolios as a hedge against unwanted inflation. Within the context of rising inflation, the fact that Bitcoin supply is fixed, while demand is set to increase, is quite intriguing to us. In relation to gold, Bitcoin’s fixed supply, ease of storage, and less controversial mining process are all potential advantages and bode well for its one day becoming a credible store of value.
- Decentralized and extremely difficult (impossible?) to hack. We like the fact that no central bank or other single entity controls Bitcoin. This makes it difficult for any individual to manipulate it. In addition, it is our current understanding, based on the decentralized and highly redundant nature of blockchain technology, that it would be virtually impossible for someone to hack the Bitcoin software protocol. This is not to say peoples’ wallets, PayPal accounts, and other crypto apps cannot be fraudulently accessed, but that risk is not specific to cryptocurrencies.
What about Bitcoin gives us pause:
- Intrinsic value? Bitcoin and other cryptocurrencies are extremely difficult to value. There is nothing tangible to back them up – not even small blocks of pretty yellow metal. Price target anchors to gold prices and other currencies and securities make some sense in theory, but we view Bitcoin as far more speculative and non-specific at this point.
- Not (yet) a store of value. A common description of Bitcoin is that it is a “store of value” similar to gold. We disagree to some extent, and instead view Bitcoin as an aspiring store of value. The reality is, the price of Bitcoin in U.S. dollars is extremely volatile, to put it mildly, and price alone does not impute value. We do not see Bitcoin being used as a reliable, more widely adopted store of value until its price becomes far more stable.
- The regulatory environment is highly uncertain. Bitcoin and other cryptocurrencies certainly have the attention of regulators across the world. We have seen some developments recently, such as the U.S. Office of the Comptroller of the Currency’s recent letter allowing banks to use crypto, and Central Banks’ interest in developing digital currencies, but so much remains unknown. While we do not believe regulatory changes pose a threat to the survival of cryptos, we are mindful of the impact changing laws could have on the market prices of Bitcoin and other cryptocurrencies.
- High costs and limited uses. So much remains to be figured out before Bitcoin and other cryptocurrencies can actually be used as currencies. Transaction costs are extremely high, often costing consumers 1.5% each time they buy and sell. Additionally, it takes enormous amounts of computing power, therefore energy, to “mine” (create) a single Bitcoin. There are limited uses as of now, but that is changing rapidly. Transaction velocity is one major limitation right now. Nonetheless, changes are underway. Only time will tell if our concerns can be sufficiently addressed to make us comfortable enough for widespread adoption across our clients’ portfolios.
In summary, while Howland Capital is not currently recommending clients have exposure to cryptocurrencies, we are intrigued, especially regarding how blockchain technology itself may pose risks to certain business models, and our work is ongoing. For additional thoughts, questions or requests, we invite you to reach out at any time.
Wishing you all the best,
The Howland Capital Team