Bitcoin ‘not an investment or a commodity’; what you need to consider


The contentious crypto currency Bitcoin made its debut on a major US exchange today, enabling futures contracts of the virtual currency to be traded for the first time.

While this means investors can participate in Bitcoin’s price movements without owning it, they still need to assess exactly what they are exposing themselves to, AJ Bell’s investment director Russ Mould says.

“Few, if any, market participants thought that Bitcoin would get to a price just shy of $17,000 as quickly as it has, if at all, so it would be foolish to try and call the top, as such price surges have a habit of becoming self-fuelling and this could easily be the case this time, given plentiful global liquidity and the finite supply of Bitcoins,” Mould says.

In the US Bitcoin is regulated as a currency while in Korea it is regulated as a commodity, and the recent surge in interest from investors suggests Bitcoin is an investment. Mould says it is imperative potential buyers put their own label on Bitcoin before they get involved to know how it will fit with their portfolio and risk appetite.

“Bitcoin is not a commodity in the classic sense, even if you can now trade futures, just as you would for oil, aluminium, cotton or orange juice, because it has no physical form and does not help buyers produce or do something else,” Mould says.

“It is not an investment because it generates no cash, so it cannot be valued in the manner of a security like a corporate bond or stock, which, when things go well, do generate cash and pay dividends or coupons. Its origins lie in the world of digital currencies and a hedge against central bank money printing but few people would feel comfortable going to a Bureau de Change if the pound was moving around by 10 per cent to 20 per cent a day or more.”

Mould also warns that crypto currency prices are almost all lower across the board now that the futures trading has begun, with Bitcoin futures for March 2018 already at a premium to underlying Bitcoins, at $19,100 and $16,715 respectively, but the underlying asset is trading below Friday’s $18,302 peak.

“But it is also noticeable that all ten of the biggest cryptocurrencies by value are currently trading below last week’s highs and some of the drops are very sharp. This may give some investors cause to wonder whether the market has already “bought on the rumour and sold on the fact”, although such a theory could be confounded if the leading cryptos were to move higher and sustainably forge new price highs.”

While the novelty factor of Bitcoin may be appealing, Mould says the appearance of innovative products can signal the top of the market.

“Under such circumstances it may be worth bearing in mind legendary US investor Warren Buffett’s comments in his letter to shareholders from 2000, just before the tech bubble burst, on the providers of innovative financial instruments and investors eager to get involved with the latest trend: ‘Many in Wall Street – a community in which quality control is not prized – will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest’.

“None of this is to say the Bitcoin game is over. But these considerations suggest would-be traders or investors need to move with greater caution than the initial futures market action would suggest they are today.”