‘I made £1bn from Bitcoin – here’s why you should not invest in it’

Bitcoin is making an unlikely recovery. From a peak of almost $70,000 per “coin” two years ago it fell by almost 80pc to about $15,000 a year later, but has since more than doubled to about $43,000 now. The original cryptocurrency has been written off many times but on each occasion has bounced back strongly.

Does this latest rally mean that Bitcoin finally deserves a place in readers’ portfolios? Or does it remain too volatile and risky for ordinary savers? Questor weighs up the arguments for and against.

The case for Bitcoin

Bitcoin is what we might call a “scarcity asset”: its value is supported by the fact that more supply of it cannot be created easily. In a way somewhat analogous to the difficulties involved in mining gold, the creation of new Bitcoins is constrained, in its case by the clever computer code that underpins every aspect of the digital currency.

“Limited supply is important for alternative assets because if you could print it ad infinitum, it would be worthless,” says Charlie Morris of ByteTree Asset Management, who has decades of experience running large multi-asset portfolios. 

He points out that there are 19.5m Bitcoins in circulation out of a total possible number capped at 21m by the computer code. That means 91.8pc of all Bitcoins that can ever exist are already in circulation.

Currently that same code limits the number of new Bitcoins created each year to 1.8pc of the existing total, but, thanks to yet another aspect of the algorithm known as a “halving”, that rate of growth will fall to 0.9pc a year in April. “This will take the annual growth in Bitcoin supply to below that of gold for the first time,” Morris says.

Constrained supply may be a necessary condition for an asset to command a premium price but it’s not a sufficient one – demand must exceed supply if the price is to rise.

“The bottom line is that demand for Bitcoin is permanent,” Morris says. “There was liquidity – people were able to sell – through the various bear markets Bitcoin has already experienced, whereas it disappeared in other parts of the cryptocurrency market. Will demand grow? Until more professional investors own it in their portfolios, until other investors do, there is the scope for growth.”

The rise of artificial intelligence is also a positive development for Bitcoin, according to Morris. He says AI will soon be initiating transactions by itself, without human involvement, and when that happens “there will be no room for normal banks because there will have to be better technology – we’ll need a form of money that’s able to deal with computers”.

Bitcoin is the obvious solution.

Morris says the current cycle should see the price of Bitcoin averaging $100,000, compared with $30,000 over the previous cycle.

“Bitcoin tends to do well in the year before a halving and in the year after one,” he says. 

Falling interest rates should also be positive for the cryptocurrency because investors have less to lose in interest if they choose Bitcoin instead of cash savings. 

The creation of “exchange-traded funds” or ETFs that can hold Bitcoin directly, is also expected soon after the objections of American regulators were overruled. This too suggests there is good reason to be bullish.

“Bitcoin always comes back stronger,” Morris says. “The bear market is over, the cycle has turned. Bitcoin is the king of crypto and is going to be a bigger part of portfolios.”

The case against Bitcoin

Duncan MacInnes can hardly be accused of being a dyed-in-the-wool Bitcoin sceptic. It was he who persuaded his colleagues at Ruffer, the investment manager, to invest 2pc of their portfolios in the digital coin in 2021, an investment that yielded a rapid profit of more than £1bn, one of the most spectacular coups in the recent history of fund management.

So his belief now that Bitcoin’s moment is in the past, and its absence from both his own personal portfolio and those run by Ruffer, are worthy of our attention.

“I was a Bitcoin zealot,” he tells Questor. “I have never believed in anything so much. We invested during the pandemic and it was the perfect asset for that moment. Trust in institutions was failing, interest rates were zero and everyone was at home [looking for investment opportunities on their computers].”

Now, 15 years after its invention, he says he is “not sure what Bitcoin is for”.

“It’s not suitable as a payment tool, it has failed as a hedge against the recent bout of inflation and the context has changed so much,” he says. “Money printing via quantitative easing has gone into reverse and the market is less obsessed with technology across the board.”

He adds: “So much money was poured into cryptocurrency by venture capitalists and so many intelligent people got involved yet it’s hard to point to any concrete results of all that money and effort and now there are new things to be excited about such as AI.

“At about the time Ruffer invested people were talking about a wall of institutional money going into Bitcoin, but it didn’t happen. If a true Bitcoin ETF had been launched then, it would have attracted huge amounts of money. But now I don’t think anyone cares, I don’t think there is pent-up demand. And I think I can prove that.”

He draws attention to the Grayscale Bitcoin Trust, a quoted American investment fund that owns Bitcoin and whose managers were instrumental in overturning the refusal of American regulators to authorise Bitcoin ETFs. As a quoted fund Grayscale can, just like a British investment trust, trade at a premium or a discount to the value of its assets.

“In 2020 Grayscale was trading at a premium of 20pc but that discount gave way to a double-digit discount. Why would you invest in an ETF and by doing so pay the full price for the Bitcoin it holds if you can buy it at a discount via Grayscale? That discount showed that there wasn’t demand.”

Another development that he expected to improve sentiment towards cryptocurrencies at the time Ruffer invested has also not come to pass, MacInnes says.

In a reference to the numerous frauds to have taken place at crypto exchanges, he says: “People thought that the arrival of institutions such as ourselves as crypto investors would force out the bad actors but it didn’t work out that way – we still saw good money going to back Sam Bankman-Fried [the convicted fraudster who ran the crypto exchange FTX]. That’s a real problem.”

MacInnes says: “I have no Bitcoin personally now and I have no ‘fear of missing out’ despite the recent doubling in its price. I think Bitcoin has had its moment.”

He adds, however, that “if I had to invest in a cryptocurrency it would be Bitcoin”.

“I don’t know much about the others but I am sceptical about them; the ones I’ve looked at are riddled with red flags,” he says.

Questor’s advice

The first assets added to Questor’s Wealth Preserver portfolio in 2021 were gold and Bitcoin, at a ratio of £1 in the crypto coin for every £4 in gold. We saw them as a complementary pair of assets valuable for their scarcity. While Bitcoin has in isolation lost money so far for that portfolio, the two assets together have produced double-digit gains.

Investors who have in mind a similar diversified portfolio may want to follow suit and hold a small amount of Bitcoin, perhaps 1pc of their total assets, along with some gold.

As an aside, Questor agrees with Ruffer’s MacInnes about other cryptocurrencies: Bitcoin is the only crypto we consider to belong in a sensible portfolio. Other cryptocurrencies have appeared in great profusion but many have lost almost all their value and show no sign of recovery. Some have disappeared entirely; some were outright frauds from the word go.

What about regulators’ hostility to Bitcoin?

Bitcoin ETFs remain banned in this country despite their expected imminent launch in America.

Britain’s Financial Conduct Authority has repeatedly warned investors about the dangers of investing in cryptocurrencies – quite rightly in our view. 

However, a ban is different from a warning and in this case seems perverse, as a regulated ETF is likely to be a safer way to invest in Bitcoin than an exchange, in view of the alarming number of failures at the latter, of which FTX was just one of the more extreme examples.

Telegraph Money has heard that the FCA was furious at Ruffer’s decision to invest in Bitcoin, on the basis that the regulator saw it as “legitimising” the digital currency.

The FCA seems to think the answer to speculation, feverish investors and dodgy promoters is to ban the asset itself. This seems to Questor to be like saying that the answer to the Tulip Mania in 17th-century Holland was to ban tulips.