The launch of three new spot Bitcoin Exchange Traded Funds (ETFs) in the US over the last couple of months has resulted in huge inflows of funds averaging $125 million every day over the first four weeks after their launch.  In the first month alone they raised more than $11 billion.  These are staggering amounts of money.

The three ETFs are Blackrock’s IBIT, Fidelity’s FBTC and Ark 21’s ARKB.  The Grayscale Bitcoin Trust (GBTC) was launched in 2013 but only received regulatory approval as an ETF in January this year.  GBTC has suffered large withdrawals of more than $6 billion whereas the three newcomers received $11 billion in investment in the first month alone.

This is a real game changer because it is making Bitcoin accessible to the masses for the first time which is likely to lead to Bitcoin becoming accepted as a mainstream investment rather than as a speculative outlier.

Bitcoin is of course just one of more than an estimated 10,000 crypto currencies worldwide https://explodingtopics.com/blog/number-of-cryptocurrencies#:~:text=As%20of%20November%202023%2C%20there,only%20around%208%2C848%20active%20cryptocurrencies.

However, Bitcoin is by far the largest and the most well-known and it is unique.

 

 

There are a number of unique characteristics that make Bitcoin special, such as its network effects, immutability, resistance to censorship, capped supply, and decentralisation.

Bitcoin is the first truly digital form of money, relying instead on a computer network rather than physical properties (such as gold and silver) or central authorities (such as government-issued fiat currencies).

Bitcoin is to crypto currency what the dollar is to fiat currency.  In other words, it is dominant, powerful and virtually unstoppable.

In a recent blog of mine, I explained why I believe Bitcoin should be an acceptable asset class and added to the traditional four asset classes of cash, bonds, property and equities along with gold https://wealthandtax.co.uk/should-investors-include-gold-bitcoin-and-residential-property-in-a-diversified-investment-portfolio/

I have personally invested in crypto currencies off and on for a few years now. My personal strategy has been to buy when prices are low and sell when they are high.  A simple strategy but one that has worked for me.  You see the volatility of crypto currencies including Bitcoin is very high compared to other asset classes.  It is definitely not an investment for widows and orphans.  When investing in crypto you have to be prepared to accept an absolute loss of capital.  It is high risk especially when investing in small, less well-known crypto currencies on less established crypto platforms.

 

 

I’ve experienced both large gains and total loss of capital.

In 2020 I achieved very large gains in excess of 100%.  I then sold all of my crypto currencies and used the proceeds to fund the deposits and fees to invest in two apartments.  I didn’t sell at the absolute peak but I was delighted at the returns I made.

I then took a break from investing in crypto currencies and watched the price fall from a peak of about $69,000 in December 2021 to a low of c.$18,000 in December 2022.

I didn’t tip my toes in the water again until 2023 when I invested a small amount, just £3,000, in Bitcoin on the FTX platform.  That proved to be a mistake as the company went bust and I lost 100% of my investment!  Fortunately, it was a modest sum.

I didn’t then feel confident to invest in Bitcoin again until a few months ago after prices had steadily been rising for a number of  months beforehand.  At the time of writing, I am pleased with the results so far. There is a method in my strategy.  You see, Bitcoin goes through a halving process approximately every four years. Investopedia’s article on it explains it very well https://www.investopedia.com/bitcoin-halving-4843769

Whenever there is a halving, the price rises significantly then is followed by a large crash.  This appears to happen every four years on average.

Now I’m not claiming to be an expert on timing or on halving but I am aware that once there has been a crash it is usually followed by a rally.  Also I am not predicting this will always happen.  It just stands to reason that if the price has fallen significantly, it probably signifies an opportunity to buy it very cheaply.  All else being equal of course.

Bitcoin’s past performance has been extraordinary of course.  See the table below.  It has outperformed every other asset class in 9 out of the last 11 years.  Its cumulative return has been 315,678% which equates to 124% a year between 2013-2023.

 

 

Do I believe it will have a similar return over the next 11 years?  Probably not.  Will it be the best performing asset over the next eleven years?  It wouldn’t surprise me.  Should most investors have some exposure to it?  As long as it is a relatively modest portion of your total investable assets and you have a higher than average attitude to investment risk then maybe an investment of 5%-10% of your investable assets could be justified.

Do I truly believe crypto currencies like Bitcoin will survive and thrive?  I am not certain it will.  Why? Because I believe governments will not allow it to succeed.  Already China has created its own Central Bank Digital Currency (CBDC) and they have banned investment in crypto currency.  It doesn’t take a rocket scientist to see what this could possibly lead to.  What’s to stop China banning the use of fiat currency (notes and coins) and making the use of  its own CBDC compulsory?  After all, the US banned the personal ownership of gold between the 1930s and 1970s.

Once a country like China controls money digitally it will control the life of every one of its citizens by monitoring and controlling everything each of its citizens do by tracking all of their income and expenditure and enabling the government to de-bank people at will if they do or say anything the Chinese government doesn’t agree with.  This is truly the prospect of a dystopian nightmare.

 

 

Will this ever happen?  Nobody knows for sure but it wouldn’t surprise me.  I have read experts’ opinions that governments will not be able to control us because they won’t have the ability to know what we are spending our money on.  They will only  be able to identify the name of the payee.  I beg to disagree.  I already have a personal finance app called Moneyhub which is able to automatically recognise a significant amount of my transactions online through open banking.  What’s to stop the government from doing the same?  Not only doing the same but using ever more sophisticated software to analyse with 100% accuracy what we spend our money on and enabling the  government to punish us for spending our money on things it disapproves of.

I truly hope such a bleak future will not happen but I am increasingly pessimistic that it will because Western democratic governments are becoming increasingly authoritarian and have become democratic in name only.  I can but hope that this trend reverses even though I am worried that the Western world is already on  a route to self-destruction.

Hopefully, my pessimism will be unfounded in which case Bitcoin and crypto currencies in general will survive and thrive.  My goodness we really need that to happen because the current fiat money system is broken.  It really needs a modern replacement which is not dependent on government control.  The current system leads to governments borrowing far too much money and destroying people’s wealth through the over-printing of money and its inevitable devaluation because of its oversupply and consequent inflationary effects which  decreases its purchasing power.

Crypto currency is not reliant on government control.  It is truly liberating.  Let’s hope it remains decentralised from government and survives and thrives.  You know it makes sense.*

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. Investing in Crypto is a high risk investment and you should be prepared to lose all the money you have invested. It’s important to remember that once your money is in the crypto ecosystem, there are no rules to protect it, unlike other investments.  If you make any crypto-related investments, you’re unlikely to have access to the Financial Services Compensation Scheme (FSCS) or the  Financial Ombudsman Service (FOS) if something goes wrong. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.