Will bitcoin become an investment asset class in 2014?
Friday 07 February 2014
There are expectations that bitcoin could turn into an investment asset class in 2014. There are three investment funds that have been or are in the process of being formed in the US.
The first is the Bitcoin Investment Trust (BIT) fund and it is the only fund open right now. The BIT fund is listed on the SecondMarket exchange in the US and is open to sophisticated investors only. The original target for fund raising was reportedly US $10 Million but they ended up raising US $55 Million in investor funds, which has now increased to US $61.1 Million over the last three months.
The next fund is the Winklevoss Bitcoin Trust (WBT) fund, which will list on a normal exchange and be open to retail investors. The fund will be an open ended Exchange Traded Fund or ETF, which means it will buy bitcoins, hold them and keep buying more bitcoins as people invest more funds. The WBT fund is expected to be listed by the end of 2014 due to regulatory complexities. It was originally scheduled for a mid-2014 launch by this has been delayed according to their lawyers.
The third fund being setup is created by a hedge fund called Pantera Capital that will open up the investment for wealthy sophisticated investors only. Reports indicate that the initial investment amounts in the Pantera fund dwarfs the size of the BIT fund, at potentially around the US $150 Million mark to start with.
Front running Wall Street
All three funds are attempting to front run Wall Street investors by getting into the bitcoin arena “early”, before other mainstream investors. Of course, the creation of these funds itself allows investors to invest in bitcoin.
One of the main criticisms of bitcoin as an asset class is the volatility of the bitcoin prices. The way I understand this is that bitcoin moved from the hobbyist phase to a speculative phase in 2013 when more people started to understand the potential of the bitcoin technology and began purchasing it as a store of value.
During the hobbyist phase, people were happy to play around with bitcoins as a fun experiment. Then gradually people realised that bitcoin could actually support a marketplace by offering the advantages of using a pseudonymous digital currency instead of cash. Bitcoin powered the underground market, the Silk Road, and this marketplace proved that a bitcoin economy could function properly. People saw the potential of the bitcoin technology and started to invest in bitcoins. This happened over the course of 2013 and even after the Silk Road was shutdown people understood what the bitcoin technology could do and they expected that it would eventually be accepted in modern economies.
The initial speculative frenzy kept rising until a peak in November 2013 which appears to have been mainly caused by Chinese speculators. The Chinese government banned payment processors and financial institutions from interacting with bitcoin in China and since then the global speculative frenzy has calmed down. So far, the people that understand the bitcoin technology who appear to be the majority of investors have not abandoned bitcoin altogether. Following the speculative frenzy to US $1,200 per bitcoin, the price is now settling to around US $780 per bitcoin.
So far in 2014, bitcoin is going through important regulatory hurdles in the US to resolve issues around law enforcement and anonymity. It is possible for the US to considerably slowdown the adoption rate of bitcoin via stringent regulation. This action would probably work temporarily but in the longer term, the technological advantages of bitcoin remains and global adoption can be expected to continue in one form or another.
Last week, New York held an open hearing into bitcoin as a first step towards developing regulations governing bitcoin businesses in the US. In my view, it appears that the regulators are open to the concept of bitcoin but they will continue to impose money laundering controls around bitcoin exchanges as a minimum. In terms of other regulations, at this stage, it appears they are unlikely to impose harsher controls due to the nascent stage of the technology. I think they are keen to see the potential of the technology emerge in terms of cost reductions, development of a global payments system and the creation of programmatic money.
If everything goes smoothly from a regulatory standpoint, and it might take two or ten months for regulations to be issued, we should see bitcoin being accepted by mainstream investors once the regulations have been solidified. So, whilst 2014 is a realistic target for Wall Street to get involved, it is more likely that mainstream investment adoption will not occur until 2015.
The current market capitalisation of bitcoin is estimated at around US $10 billion. If mainstream investment in bitcoin ever takes off, the potential for the market capitalisation to explode much higher is very real. If mainstream investors invested just 1% of their assets into bitcoin, the market capitalisation of bitcoin would skyrocket due to the volume of investment dollars versus the limited availability of bitcoins.
Of course, the problem will be getting bitcoin to mainstream investment class status. Without regulatory certainty, bitcoin will remain largely a fringe speculative asset class. This is not necessarily a bad thing as the window for early adopters to buy a bitcoin remains open for that bit longer.
By Lloyd Chin
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