Bitcoin has just surpassed $50,000 per unit, before falling back a bit. Does the approval recently given by the US authorities to list this digital asset on the stock market, as an investment vehicle, give it wings? Philippe Trainar explains why Bitcoin has a future on the stock market, even if its precise potential remains uncertain and speculative
Until recently, there was every reason to believe that bitcoin, which is out of control, suspected of being used to launder dirty money, whose fundamentals are unknown and whose price fluctuates on an exceptional scale, has no future and should not have one. However, a recent decision by the US financial markets watchdog, the SEC, calls into question this belief. The SEC has indeed decided to accede to the request of many banks and investment funds that wanted the issuance of bitcoin index funds to be allowed, a decision that is seen as the starting point for the expansion of the cryptocurrency on the stock exchange.
A very restrictive algorithm
The decision is prudentially based on three considerations. First of all, the issuance of bitcoin does not escape all control, it obeys a known, precise and restrictive algorithm. It will not exceed 21 million units in total and annual emissions are steadily decreasing according to a pre-established pattern… This algorithm is much more restrictive than the central banks’ inflation target. Secondly, bitcoin is no longer a safe haven for fraudsters and criminals, as governments are now able to trace the blockchain more easily and securely than bank accounts.
Finally, we know the fundamentals of bitcoin as well as those of legal tender currencies because they are the same. The fundamentals of any currency are the value of the transactions it can finance. From this point of view, the only difference between bitcoin and existing currencies such as the euro or the dollar lies in the fact that this value is known for traditional currencies, it is at least the national GDP, while it is unknown for bitcoin which has clearly not reached its cruising speed. And it is this uncertainty that explains the high volatility of Bitcoin’s price.
Predictable but also limited
Does this make it an asset of the future on the stock market? Bitcoin has some undeniable advantages that make it a good candidate to replace, at least in part, existing currencies. The creation of bitcoin is not only predictable but also limited thanks to its algorithm. In doing so, it guarantees, at cruising speed, a positive return on this digital asset, since the transactions that bitcoin “represents” increase with economic growth while the supply is capped, allowing its purchasing power to increase. Conversely, the creation of traditional currencies is unpredictable and discretionary. At best, it provides a negative real return of 2% over the long term if central banks are credible.
But bitcoin also has serious disadvantages. As opinions about its future are heterogeneous and volatile, they induce a high volatility of the price of bitcoin, ten to twenty times higher than that of bonds denominated in traditional currencies. In addition, Bitcoin has little obvious comparative advantage in terms of diversification from other assets or hedging investors’ liabilities (against inflation, recession, disasters, etc.). As a result, today, Bitcoin’s share in an optimal investment portfolio can only be marginal, except for those who are looking for strong emotions in terms of volatility and risk. Finally, bitcoin is energy-intensive and its ability to price transactions correctly depends on competition between the “miners” who calculate the rates, which falls when the price of energy rises.
A Future for Cryptocurrencies on the Stock Exchange
Bitcoin therefore has a future on the stock market, but its precise potential remains uncertain and speculative. The success of hard currencies, which provide a positive return for savers spending in weak currencies, gives cause for optimism. But, the cap on the creation of bitcoin could just as easily exert a strong constraint on its development… Not to mention that central banks are not going to stand still in the face of competition from this digital asset. They could launch their own cryptocurrencies, with their own advantages. While the future of bitcoin on the stock market is still uncertain, even if it is positive in the short term, the future of cryptocurrencies on the stock market is clearly very positive in both the short and long term.
