Digital gold: the institutional case for Bitcoin

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Look, I’ve always been pretty skecptical of Cryptocurrencies and Bitcoin. My typical argument would be that if you evaluate it against the characteristics of a typical financial asset you find that it has: no income, no claim to crytalise value and no inherent value.

But perhaps that is too narrow a way of looking at it – this conversation with Jos North of Ruffer (an Edinburgh based asset manager who made headlines with a $500m investment in Bitcoin last December) made me think again.

Basically the case that’s becoming increasingly talked about is as a form of “digital gold” thanks to the restricted supply in a world of (over)abundant Fiat money. Ruffer are very wary of inflationary risks in today’s world – in that they certainly aren’t alone – and they have been looking to find assets that they think can offer clients’ portfolios a store of value in an inflationary world.

The debate around Bitcoin is so polarised it’s almost comical, but the “educated” view is far more nuanced: it isn’t that Bitcoin is (or could be) digital gold, it’s that there’s an increasing probability that it might be, and the second-order argument: that others might increasingly start assigning a higher probability to this outcome.

For what you might call a Bitcoin “bull”, Jos sums it up in a very balanced way: “Bitcoin isn’t the best thing, or the worst thing, in the world. But in an inflationary world merits a small allocation in portfolios”.

Interestingly, one of the things about the “digital gold” argument is the fact that the velocity of Bitcoin in circulation is actually decreasing, so rather than evolving toward a transactional currency (which might be stopped by governments) it increasingly seems like it is being held by longer term holders (like gold).

Now do the energy thing

The critism of Bitcoin that has become so knee-jerk it’s almost a cliche is the energy consumption. Yes, you’ve heard it before a milion times that Bitcoin consumes more energy than Holland, and yes, probably a lot of this comes from dirty coal in China.

Jos put a different spin on this argument. For a valid comparison you should compare the energy consumption of Bitcoin mining against something more relevant like say, gold mining. He cites Bitcoin mining as only consuming 40% the energy of gold mining (while also causing less enviornmental impact). I’m sure that’s genuine, although you can find articles online to support either case. This and this seem like balanced reads. I have read some articles that suggest the comparison isn’t so clear-cut. Still, you should ask anyone putting forward the Bitcoin energy argument to make a relevant comparison against comparable assets like Gold.

One of the key things that seems to have fallen into place for Bitcoin this time around is the custody point – the fact that providers like Coinbase exist that ensure you don’t need to remember your password or risk a hack stealing your coins. This is probably one of the key things for serious institutions like Ruffer and other asset managers who will have standard operational due diligence (ODD) checks that would need passing. Alongside this, it “feels” slightly less scammy and spammy this time round than it did in the 2017 run-up, although I’m still pretty suspicious of any social media profiles with #crypto in the bio.

The other point I hadn’t appreciated was the move to push out the “bad actors” in the Bitcoin world, made possible by the fact that the underlying blockchain technology is pseudonymous rather than anonymous.

It hasn’t turned me in to a raging Bitcoin bull or anything – and I still find it hard to see how a trustee board or investment committee would approve a long-term allocation. Like Joe Weisenthal speaking on Planet Money recently said, it has a lot of similarities with a religion and a faith-framework is perhaps the easiest way to understand it. But I can see it becoming a more common feature in a decent proportion of fund managers’ multi-asset portfolios.

Crucially the investment case for it doesn’t need to become 100% clear cut either way – managers don’t need to become a totally devoted acolyte for that to happen. Just hedging that some portion of the investment community might view it as having some probability of becoming digital gold in the future is maybe enough.


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