Bitcoin’s surge a test for the sceptics

By the time newspaper articles report bitcoin’s price is soaring, you have already missed the boat. Picture: Getty Images

If you bought bitcoin at the beginning of 2023 you would be almost 500 per cent richer today.

Yet many are unconvinced that crypto is anything other than a modern day “Dutch tulip” while others believe the golden age for bitcoin is just upon us.

If you are a seasoned investor, it is probably time to review cryptocurrency again and either finally jump on the bandwagon to have some exposure or reaffirm previous decisions to avoid the sector at all costs.

Bitcoin, which represents more than 60 per cent of the total market capitalisation of cryptocurrency, has experienced strong tailwinds over the past 12 months.

In recent weeks, the Donald Trump election win has spurred crypto markets higher mainly due to the incoming president’s supportive position on crypto. President-elect Trump has previously announced that he wishes to create a strategic bitcoin reserve similar in nature to the country’s gold reserve.

Whether this will actually occur is yet to be seen in the US, but Warren Buffett is still not sold on crypto at all.

In 2018 the “Oracle of Omaha” said at the 2018 Berkshire Hathaway annual shareholders’ meeting that bitcoin was “rat poison squared” and followed up with further comments in the 2022 AGM that “if you told me you own all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it because what would I do with it?

“I’d have to sell it back to you one way or another. It isn’t going to do anything.”

The point that Buffet makes is that bitcoin, and more broadly most cryptocurrency, has no intrinsic value.

One of the world’s greatest investors, Warren Buffett has no interest in cryptocurrency. Picture: AFP

It is not backed by a government and it is not backed by a gold reserve. It exists because someone had an idea and decided to create it at some point in time and it continues to grow in value because others have subsequently bought it and paid more each time.

Fans of crypto say that the market will continue to flourish due to the scarcity of bitcoin’s 21 million coins, and they use technical terms such as decentralised networks, global accessibility and digital gold narratives to support their case.

Cryptocurrency fund manager Vikara co-founder and co-portfolio manager Mark Riccio is understandably, bullish about cryptocurrency.

“The recent surge in crypto markets reflects a confluence of macroeconomic factors and political developments,” he says.

“With Trump’s pro-crypto stance catalysing regulatory optimism and the Federal Reserve signalling a more accommodative monetary policy, liquidity is returning to asset classes like digital assets. At the same time, we are seeing renewed retail interest.”

Another issue that crypto investors face is the boom-and-bust nature of the crypto price cycle. As many property investors say, you make your money when you buy, not when you sell – and this is very much the case with cryptocurrency.

Donald Trump speaks at July’s Bitcoin 2024 conference in Nashville, Tennessee. Picture: Getty Images

Despite the recent surge in prices, many crypto investors who bought in near the last peak in 2021 are still in the red, while others who bought just a year later have multiplied their initial investment between three and five times.

So if you think bitcoin (now trading near $US98,000) is here to stay and it might start to get less volatile over time as the big end of town adopts it, what is the best way to get an exposure?

There are several pathways an investor can use to access crypto, from direct coin ownership, to using an ETF, or a hands-off approach via a crypto specialist fund manager.

Going direct, there are dozens of crypto exchanges where you set up an account, load it up with cash and then buy crypto coins directly into your crypto account, known as a wallet. It is a very similar process to buying shares on the ASX. However, as industry regulation is still developing, due diligence on the exchange is strongly recommended and an established, reputable Australia-based exchange is a good starting point.

The ASX has several bitcoin ETFs which mirror the bitcoin price offered by Global X, VanEck and DigitalX. For a more diversified exposure, Betashares and Fidelity offer crypto ETF baskets that provide exposure to companies in the cryptocurrency ecosystem, such as blockchain companies, crypto exchanges and crypto miners.

Crypto is something that investors should not ignore. Research into the area is recommended and if you do not feel comfortable, do not invest. Some will take a position as a “raffle ticket” investment on the view that you need to be in it to win it, while others will avoid the sector altogether.

As a rule of thumb, based on previous cycles, by the time you see “cryptocurrency soars” articles in newspapers, it is usually too late to invest because the big returns have already occurred.

James Gerrard is principal and director of planning firm financialadviser.com.au