Bitcoin, a novelty digital currency, kicked off the new year at a lofty price of $1100 at market close on Tuesday, levels last seen in December 2013. Often dismissed as a niche, or fad, Bitcoin surprised critics as the best performing currency and commodity asset at the close of 2016. The momentum has spilled over into 2017, as the third leg of an impressive +135% return rally continues. Enthusiasts and high risk appetite investors exposed to this cyber asset class, are feeling vindicated, after years of touting its promethean qualities.
As a web based cryptocurrency, with no central banking authority that governs it, Bitcoin relies on a global peer to peer network of computers to enforce its simple monetary policy – a fixed supply of 21 million bitcoins. Underpinning it is the Blockchain, a public record of all the available supply, ensuring no single entity can game the system. This token, native to the blockchain, straddles the role of currency and commodity.
The only thing that people seem to agree on, is that Bitcoin divides opinion. Now in its 8th year, it has come up against skeptical pundits, who fault its pseudonymity, consensus mechanism, and fixed monetary supply. But, critics also often get it wrong. Recent events have shown, these protean qualities are in fact propelling the digital asset into the mainstream psyche. As I saw it, the economic events of 2016, highlighted two important points that portend well for the future of this nascent asset – markets are fickle and people are irrational.
In the wake of the Thursday, June 23, United Kingdom referendum, Bitcoin reveled in the uncertainty of a widely unanticipated Brexit result. The sterling pound fell sharply to a record 35 year low against the dollar. In a matter of days, XAU gold rose to its highest price in 2 years, while XBT bitcoin surged 8.7% to $680. In the United States, the early results of the US elections trickled in on November 9, indicating a shocking Trump win. Bitcoin jumped +3% over the course of 4 hours, just before official results came out.
In the past, such events would prompt investors to diversify their portfolios into perceived safe assets like gold. But the contemporary world of today has a different set of dynamics, for instance, we spend far more time on digital devices and internet communications than any time in the history of humanity.
Bitcoin’s creators, contrived to mimic the qualities of gold as an alternative for an internet driven society. At the height of the financial crisis in 2009, as droves of depositors queued outside banks to find out there was no money to withdraw, Bitcoin was born. The first bitcoin transaction was embedded with an apt headline from the Times edition, 3rd January, 2009: “Chancellor on brink of second bailout for bank”
Bitcoin’s monetary policy set out to be free from the price controls of presidential appointed central bankers. Because it is digital, it shed off the bulkiness and logistical nightmares of handling 12.4 kg metal bars, making it instantly accessible to anyone in the world with a mobile phone. Its resistance to seizure by both states and oppressive regimes, decisively set it apart from gold.
These lessons were drawn from the events of 1933, when an Executive Order 6102, signed Franklin D. Roosevelt criminalized the possession of private property; individuals, associations and companies could no longer hold monetary gold and were required to redeem it in 14 days at a fixed price of $20 per troy ounce. This outrageous ability of the state to take private property by force, and set prices, bothered monetary purists for decades, until Bitcoin’s nifty design solved this age old problem.
Owning Bitcoin equates to full ownership and control over property, just like a bearer bonds or cash. No state, dictatorship or oppressive regime can seize your bitcoin once held.
For the Chinese, this salient quality comes in handy when bypassing tight capital controls by the People’s Bank Of China, after the Yuan’s weakest showing in 20 years, a 7% devaluation over 2016. Chinese exchanges accounted for over 90% of trading volumes and the Bitcoin/Renminbi was the most actively traded currency pair.
As the risk for traditional currencies rise, like the Naira’s devastating 30% plunge against the USD, the idea of a digital disaster hedge suddenly does not seem too strange. It is why Bitcoin is attracting the interest of hedge funds, brokerages and institutional investors.
But the currency is not without its struggles. Central bankers are dubious of a monetary system outside their control. In December 2015, after a local court case between payments company BitPesa and Safaricom Ltd. over the legality of virtual currencies like Bitcoin, the Central Bank of Kenya put out a notice clarifying Bitcoin was not legal tender. Its novelty means there is no broad consensus on how to regulate it – which is both a challenge for regulators and an opportunity for entrepreneurs.
To appeal to mainstream finance, Bitcoin has had to relent on some of its ideological stances, and distance itself from associations with dark markets, and exchange hacks. The second wave of entrepreneurs are cognizant of this more than ever, and are now building companies willing to work with regulators.
Later this year, the Commodities and Futures Trading Commission (CFTC) will debut a pair of Bitcoin dollar priced indices to track the virtual currency. Alongside the Bitcoin Investment Trust, an OTCQX publicly traded investment vehicle, and a COIN ETF application under review by the Securities and Exchange Commission, these are the building blocks for pricing mainstream financial products that will make Bitcoin more readily accessible to traditional investors.
Some Austrian leaning Bitcoin economists, like Jon Matonis, imagine a future where countries could have Bitcoin on their balance sheet as a reserve asset, a similar role to how nations treat gold. Today, 1 Bitcoin is priced as much as an ounce of gold; the idea is inching closer to reality.
All these factors make Bitcoin an exotic asset class choice for portfolio diversification. Its price movements are uncorrelated with events in Kenya. Nairobi securities exchange investors for example, would have done well to part expose themselves to Bitcoin, after the NSE 20 share index was down 21% at the close of 2016. Only time will tell, no one said the path to world reserve currency status was going to be easy.
By Mr. Michael Mwangi Kimani
Michael is a Bitcoin Market Analyst and Co-founder at Umati Blockchain Ltd., a company bridging the gap between East Africans and Bitcoin blockchain technology.
As a recognized thought leader on Bitcoin in East Africa, he has been featured on BBC Radio show, CNN, Fast Company and regularly writes opinion for the Daily Nation and other publications on the subject.
Prior to Umati, Michael traded derivatives on Chicago’s Mercantile exchange and most recently, worked with Emerging Futures Lab on human centered design research for East Africa’s informal sector and digital financial services.