Bitcoin, the cryptocurrency standard bearer, delivered a more than 300% return last year and has started 2021 on the front foot, rising more than 10% in January.

Where should investors expect it to go from here? Naysayers predict a repeat of its previous 2017 post-bull market collapse with Nouriel Roubini, the economist dubbed “Dr Doom”, calling it a “pure speculative bubble with no fundamental value” in the Financial Times.

Market commentators cite several factors for the meteoric ascent of Bitcoin over the past year, including unprecedented monetary easing by central banks that may have eroded trust in regular currencies, a collapse in yields resulting in non-yielding Bitcoin becoming comparatively attractive, and speculation that it may be the medium of exchange of the future.

What Bitcoin and cryptocurrencies actually are is notoriously hard to either understand or accurately explain.

US comedian John Oliver famously labelled them as “everything you don’t understand about money combined with everything you don’t understand about computers”. Disciples of the “asset class”, if indeed it can be described as that, claim however, that they represent the future of finance and the global economy.

Massive doubts remain. Daniel Aronoff, professor of economics at MIT, notes a number of fundamental flaws with this hypothesis. Firstly, it is unlikely that Bitcoin or any cryptocurrency becomes widely used as a medium of exchange (i.e. to buy things, be it your morning coffee or a house with a mortgage) as Bitcoin “processes blocks of transactions once every 10 minutes on average and the digital width of a block is limited. For perspective, it is estimated that Bitcoin can process about 4.6 transactions a second, compared with Visa, which processes around 1,700 transactions in the same time.”

Secondly, it is not possible for a currency to become a store of value if it is not considered a medium of exchange.

So what is going on?

Gavin Davies, of Fulcrum Asset Management, argues in the Financial Times that a more likely explanation is that investors are increasingly starting to view it as an alternative to that asset class John Maynard Keynes famously labelled a “barbarous relic” – gold.

The question therefore should be: Can cryptocurrency seriously compete with gold as a safe asset and ultimate store of value?

While this sounds improbable, increasingly hedge funds and even some conventional asset managers are starting to use it as a hedge for inflation. Bitcoin functions in a similar way gold does – in the same way that there is a finite amount of gold in the earth, there is a finite supply of Bitcoin in the blockchain. Clearly, after 2020, investors have realised that there is no finite supply of dollars the Federal Reserve is willing to print.

All this may well lead to a continued rise in the value of cryptocurrencies, until at least money supply shrinks and interest rates start to rise. Investors who are either brave or, counterintuitively, risk-averse enough to participate, should take note. DM68

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.