A Bitcoin-based exchange-traded fund from Cameron and Tyler Winklevoss may sound like the plot for a sequel to The Social Network but, after the venture-capitalist identical twins filed a prospectus with the US Securities and Exchange Commission on 1 July, it is set to be a genuine place for people to put their money. However, we will be declining the opportunity.
Should you have yet to come across the concept of Bitcoin, it might be summarised as an electronic form of currency designed to be beyond the control of any state or central bank. Its creators say the hugely complex computer algorithms involved ensure the supply of Bitcoins will stop when there are 21m of them – around the year 2140 – and this may at least partly explain how the peer-to-peer payment mechanism has, for some, taken on a second role as a store of speculative value.
We use the phrase ‘speculative value’ because, we believe Bitcoins have no intrinsic value whatsoever. There is no way of working out the actual value of a Bitcoin beyond saying it is worth only what somebody else is willing to pay for it – and that puts the whole thing firmly in the realms of speculation as opposed to investment.
We are aware this subject polarises opinion to quite a remarkable degree, with Bitcoins having some extremely, let us say, passionate and forthright advocates. With that in mind, let us for a moment move away from the views of Schroders’ UK value team and instead consider some of the risks of investing in Bitcoin straight from, as it were, the horse’s mouth.
Within the freshly-filed prospectus for the Winklevoss Bitcoin Trust are to be found more than 50 risk factors, including – to underline our point on valuation: “The further development and acceptance of the Bitcoin Network and other Digital Math-Based Asset systems, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate.”
Meanwhile, some fairly basic investment risks include: “The [EXCHANGE] may halt trading in the Shares, which would adversely impact investors’ ability to sell Shares” and “Currently, there is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in the Shares”.
More topic-specific risks include: “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” and “The loss or destruction of a private key required to access a Bitcoin may be irreversible. The Trust’s loss of access to its private keys or its experience of a data loss relating to the Trust’s Bitcoins could adversely affect an investment in the Shares”.
We will quote just one more risk factor, which like many of the others, rather speaks for itself: “It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction.”
Despite all of the above, it may well be the price of Bitcoins goes up for some years to come – that is in the nature of speculation, just as it was with the Tulip and Bulb Craze in the 17th century, the South Sea Bubble in the 18th century and plenty of other occasions since. However, we are happy to sit this one out on the sidelines – and to wait for that movie sequel.
Kevin Murphy is a fund manager in Schroders’ UK value team and writes at The Value Perspective