We have been receiving a lot of enquiries and questions regarding Bitcoin over the last few months from clients and colleagues alike. As such we wanted to do a specific piece regarding this new asset, something that we hope some of you find interesting and informative. After forcing itself into the public domain with its spectacular 2017 price appreciation and arguably more spectacular collapse at the start of 2018 where is Bitcoin today?


What is money?

From bartering; the original form of exchange to cattle, shells, metal money, modern coinage, paper currency through to the Gold standard and modern-day fiat currency one thing we can say is that money has continued to change and evolve over the course of time. As such the notion that what we view as money today is what will continue to be seems somewhat myopic. As we have evolved and adapted to new technologies the money we use has changed and todays monetary system is currently being challenged.

Money is broadly defined by having 3 core characteristics: a medium of exchange; a unit of account and a store of value. The one factor that has dictated the success of any given money throughout history is scarcity and nowhere is this more evident than the meaningful role gold has played for centuries. Gold was officially made the standard of economic value in England with the Coinage Act of 1816 where the value of pound sterling was defined relative to gold. At this time the non-inflationary production of bank notes, being backed by physical gold on a 1:1 basis was approved. A combination of the gold satisfying the 3 characteristics of money whilst also maintaining relative scarcity enabled this standard to proliferate across the world and help create a framework for a monetary system that was in use for over 150 years. Following the end of World War II, the victorious allied nations introduced a regulated system of fixed exchange rates between countries that were indirectly disciplined by a USD dollar tied to Gold. This system, known as the Bretton Woods system continued until 1971 when the US Government abandoned the gold standard altogether announcing they would no longer convert dollars to gold at a fixed value.

What has since dominated the 20th century is fiat currency, government issued legal tender that’s value isn’t backed by a commodity, and has no intrinsic value. Instead it has value because of the trust we place in the government to enforce it. The implicit issue in this form of money is its elasticity, governments control the amount that is issued and the more that’s produced the greater its value depreciates. Since the financial crisis of 2008, and the unprecedented quantitative easing seen in response, the amount of money in circulation has more than doubled across the 12 major economies. It is no co-incidence that out of the ashes of the financial crisis we saw the creation of Bitcoin; a response to the Governments printing press that offers an alternative monetary solution. Bitcoin is a fixed supply asset, controlled by no central government or authority, that is open to everyone leveraging new technology that can now be used on a peer-to-peer basis.

There will only ever be 21million Bitcoin created, and 18.5million are already in circulation leaving 2.5million left to be mined and made available over the next 120 years. Compare and contrast that to the $9 trillion the Federal Reserve has injected into the system in 2020, making up 22% of all USD issued since the birth of the nation. Bitcoin is the only asset whose supply is fixed and will never change, as such from a scarcity perspective it is unparalleled, and this is in some people’s eyes the characteristic that places Bitcoin above all that has gone before as the future of money.

A very brief history of Bitcoin

On October the 31st 2008 a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This whitepaper detailed methods of using a peer-to-peer network to generate what was described as "a system for electronic transactions without relying on trust”. On January 3rd, 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins.

Bitcoin was born. A digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities It was invented and implemented by the presumed pseudonymous Satoshi Nakamoto, who integrated many existing ideas from the cypherpunk community. Whilst the identity of Satoshi remains a hot topic for speculation, Bitcoin has become over the last 12 years the most recognized cryptocurrency on the planet, with a market capitalisation at time of writing of $307bill.

Whilst the path to acceptance has not been smooth, and the early silk road narrative persisting for many years, with good reason, the general consensus seems to have shifted and Bitcoin appears here to stay.

Bitcoins original edict was as a form of electronic cash and there are many complimentary protocols and services developed or underway that may enable it to satisfy that in the future. However, as things stand it is now more widely accepted as store of value akin to a digital version of gold. Given its dominant position as the most widely recognised, accepted and used cryptocurrency there is an argument that it is also satisfying another key component of money; a unit of account as many assets are now priced against Bitcoin.

Institutional Outlook

In October 2017 Jamie Dimon the JP Morgan CEO famously stated, “If you’re stupid enough to buy it, you’ll pay the price for it one day”, and went as far as calling Bitcoin “a fraud”. At the height of crypto mania there were many from the traditional world of finance who shared this view and were disparaging about Bitcoin, cryptocurrencies in general and the technology itself. What has followed over the last 3 years has been a softening in stance and in many parts a complete U-turn regarding Bitcoin. There is almost universal acceptance that the technology that underpins Bitcoin will have profound effects on how we exchange value in future and there is widespread acceptance that Bitcoin is here to stay. JP Morgan themselves are leading this space from a bank perspective with several blockchain initiatives underway under the recently launched Onyx brand.

Bloomberg considered by many as the voice of institutional finance have been forward thinking in their approach to cryptocurrencies and Mike McGlone their Senior Commodity Strategist offers regular insight and research on the space. We have attached his most recent quarterly report which details his views on the landscape and specifically Bitcoin. Only this week Tom Fitzpatrick, Citibanks Chief Technical FX Strategist released a research piece for their institutional clients that includes a 2021 price prediction of $318,000. Whilst we are not particularly interested in price predictions the focus shown by banks and associated coverage of this asset to their client base tells its own story.

With public companies now investing their treasury reserves into Bitcoin (Microstrategy, Square), mainstream financial companies building products and services that can facilitate Bitcoin adoption (Paypal, Mastercard) and a growing belief that Bitcoin is the optimal inflationary hedge (Paul Tudor Jones) there continues to be institutional support for Bitcoin and we expect this to accelerate into 2021.

By Simon Forster