Here today, Gox tomorrow – Bitcoin remains little more than a speculators’ playground


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

When we touched on Bitcoins in July 2013 we mentioned the following “the Bitcoin exchanges on which Bitcoins trade are relatively new and largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products.” “It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries …”

Well, yes, it is easy to be wise after the event – whether the event in question is the freezing of the Mt. Gox Bitcoin exchange in Japan or Vietnam banning its banks from handling Bitcoins or a similar sort of crackdown in Russia. Sometimes it is easy to be wise before the event and those quotes first appeared on The Value Perspective in July 2013 in Two sides of Bitcoin.

They were among the six “risk factors” we highlighted out of the more than 50 set out in the prospectus for a Bitcoin-based exchange-traded fund the Winklevoss twins – of Facebook and the social network fame – had just filed with the US Securities and Exchange Commission. Our main point was that looking to make money from Bitcoins is very much speculation, not investment.

Clearly nothing that has happened in recent weeks will have served to alter that view. Take what has happened to Mt.Gox – once the world’s largest Bitcoin exchange – which has now filed for bankruptcy following the reported discovery that 744,008 Bitcoins held on behalf of its customers have gone missing.

That number represents some 6% of the 12.44m Bitcoins presently in existence and at the current price … well, with Bitcoin the current price can be something of a movable feast. Still, as we type this line, one Bitcoin ought to net you $660.28, meaning what has gone missing would in theory get you in the region of $491m or £295m.

The “ought” and “in theory” we felt necessary to include in that last sentence point to some of the issues we have with Bitcoin when it comes to a topic most dear to our heart – value. That aspect is also addressed in an interesting ft article Bitcoin is still a useful bludgeon, written by Jessica Einhorn, resident senior adviser at the Rock Creek Group in Washington.

In it, Einhorn confesses to a certain “misanthropic interest” in the travails currently being suffered by Bitcoin on the basis she believes it and other so-called ‘cryptocurrencies’ – what she defines as “electronic tokens that pass irretrievably from buyer to seller – will become extinct. “But for now,” she adds, “they serve a real public purpose as an instrument of reform.”

These days plenty of articles on Bitcoin and other virtual currencies tend to touch on the three major functions of money and the ft one is no exception. The first function is as a unit of account and here Bitcoin scores poorly – after all, how useful can it be on that front if it is almost always being expressed in terms of another currency, most often US dollars?

The second function of money is as a store of value, which means Bitcoin still has to get off the mark. as we suggested earlier, the price of Bitcoin rarely sits still for long – as we type this line, one Bitcoin now ought to net you $664.60 – but, if you visit, you will see it is offered at some markedly different prices across seven different exchanges, including $135 on the frozen Mt.Gox.

Those are hardly a comforting sign for a currency, but let’s give Bitcoin a chance and consider its longer history. in January 2013, one Bitcoin was valued at just $13, meaning the price in the last paragraph is up some 51 times – and yet it is also down almost half on its $1,155.25 peak last December and by roughly a quarter since the start of February when it first emerged Mt.Gox was experiencing problems.

Here on The Value Perspective we struggle to see how anyone might view such extreme lurches in price as in any way consistent with the phrase “store of value” although we do agree with Einhorn that where Bitcoin does score is in the context of the third function of money – as a way to transact. Thanks to its very low fees, Bitcoin is seen as a very ‘frictionless’ way to buy and sell across the internet.

The clearest advantage enjoyed by the cryptocurrencies, Einhorn argues, is in the way people will buy more of them “to bypass the fees charged by traditional payment processors such as PayPal and the credit card companies”. Putting a commendably positive spin on things, she thus identifies Bitcoin as having a potentially positive value as an instrument of reform. In investment terms, however, that does not to our mind prevent it from being anything other than a speculators’ playground.


Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

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