The Investment Case for Bitcoin | BTCE

Introduction

The introduction of gold coinage by the Lydian King, Croesus in 6th Century BC, changed the way goods and services were valued and exchanged by replacing the age-old barter system. Gold was something rare, tangible, beautiful and could store value in a small, portable and almost indestructible form.[1] 

The introduction of paper money in 11th Century China was the next evolution – paper has little to no intrinsic value, but a bank note obtained value because it could be exchanged for a specified amount of gold held by the government or central bank– a system known as the ‘gold standard’. This system lasted until the 1970’s when President Nixon severed the relationship between the Dollar and gold and ushered in the age of fiat currencies.[2]   

Most modern currencies are fiat, including the US Dollar, British Pound and Euro. Fiat currencies are issued by a government and not backed by gold, but instead have value because of the faith that individuals and governments have that other parties will accept that currency.  However, the age of central bank issued fiat currencies is being challenged. In 2008 a new idea was introduced by an unknown person or group using the name “Satoshi Nakamoto” – Bitcoin.

Bitcoin is a decentralized digital currency without a central bank, government or single administrator. Bitcoin can be sent between users on the bitcoin network without the need for intermediaries.

It relies on a technology called blockchain - a list of records (blocks) that are linked by cryptography – hence ‘crypto’ currency. Each block contains a timestamp, a cryptographic tag of the previous block and transaction data. Blockchain is highly secure, fast and hard to tamper with as changes to a block must be validate by a majority of users within the system. This makes it great for transferring sensitive data, including contracts, shareholder details, medical records or money transfers.

The Investment Case for Bitcoin

The first Bitcoin transaction occurred in 2010 when two pizzas were bought for 10,000 BTC – at the time worth $30. Records make no mention of the toppings or if there was a stuffed crust.

Since then cryptocurrencies have rarely been out of the headlines, prompting increased investor interest and a raft of competing currencies.  Estimates vary on the number of cryptocurrencies - research site CoinMarketCap tracks over 5,000, but few of these have ever come close to Bitcoin’s meteoric success. Given the growing institutionalization of the Bitcoin market and acceptance of the long-term viability of Bitcoin as an alternative digital currency, there are compelling arguments for investors to consider adding a Bitcoin allocation to their portfolio:

• High growth potential vs traditional asset classes;
• Low correlation to other asset classes and diversification;
• Potential for improved risk-adjusted returns in a multi-asset portfolio.

However, please remember:

• Bitcoin can be a volatile product
• The price of Bitcoin can go down as well as up and your capital is at risk

Performance and Growth Potential

The performance of Bitcoin has been strong against main indices over 1, 3 and 5-year periods, providing a new source of potential returns. Due to its finite supply, Bitcoin can also act as a useful store of value in countries that are experiencing extreme currency fluctuations or inflation. However, these impressive growth numbers come at a cost of high volatility meaning investors could lose a significant portion of their allocation if they bought in at the wrong time. Analysts expect Bitcoin volatility to reduce as the market becomes more regulated and further institutionalises.  

Performance of Bitcoin vs other financial instruments

Source: Bloomberg. All data as of 31st December 2019. Past performance is not a guarantee of future returns.

Demand is Rising, But the Supply is Strictly Limited

Key to the maintenance of a currency's value is its supply. A money supply that is too large could cause prices of goods to spike, resulting in economic collapse. A money supply that is too small can also cause economic problems.

Bitcoin is actually a hard currency, with a defined and finite supply hardwired within its codebase - unlike fiat currencies where governments or central banks have the power to increase the money supply at will.

When Bitcoin was launched in 2009, its developer(s) capped the supply of tokens at 21 million coins. The current supply of Bitcoin is around 18 million and importantly, it’s becoming harder and harder to mine as the rate at which Bitcoin is released is halved roughly every four years.

When a halving occurs, it means the Bitcoin reward that miners receive for solving a mathematical problem / adding a block to the blockchain is halved. This makes it increasingly difficult to mine Bitcoins and increases the cost of mining and the scarcity value of Bitcoin. The last halving just occurred in May 2020.  Historically, Bitcoin halvings have been followed by a long-term increase in the value of Bitcoin.

Past performance is not a guarantee of future returns. Data as of 13th May, 2020, Source Bloomberg.

Correlation and Diversification:

One of the most compelling arguments for a Bitcoin allocation is its low correlation to other widely held asset classes both in periods of market calm and turbulence. Bitcoin’s independent behaviour means that it has the potential to be a powerful diversification tool in a multi-asset portfolio.[3] 

Source: Bloomberg. Data as of 31st December, 2019

Due to its powerful diversification characteristics, Bitcoin can play an effective role boosting portfolio efficiency. In the two following charts we show the impact of adding a small bitcoin allocation to a US equity portfolio.

The first chart illustrates a basic buy and hold strategy whereby an investor replaced between 1% and 5% of their equity allocation with Bitcoin.

Historically, investors would have seen significant benefits of holding even a small quantity of Bitcoin, with returns improving in line with the size of the allocation. An investor in this scenario with a 5% Bitcoin allocation would have made nearly 3x more over the period than an investor with no allocation.

For Illustrative purposes only Past performance is not a guarantee of future returns. Data as of 13th May, 2020, Source Bloomberg.

Many investors will regularly rebalance their portfolios back to target weights for specific assets. If the given Bitcoin allocation was reset on a monthly basis, historically, investors would have lost out on a significant amount of performance resulting from the compounding effect of the Bitcoin allocation.

In addition, investors would also have incurred substantial trading costs to perform the rebalance that would further detract from performance and which are not captured in this chart.

For Illustrative purposes only Past performance is not a guarantee of future returns. Data as of 13th May, 2020, Source Bloomberg.

Given these appealing characteristics, Bitcoin can potentially play a powerful and useful role in a multi-asset portfolio – so why haven’t more institutional investors embraced its potential?

Why Don’t More Investors Buy Bitcoin?

Despite these desirable characteristics, many investors still perceive Bitcoin as an experimental asset that is complicated to trade and open to abuse. Stories of cryptocurrency frauds and failures and the collapse of high-profile cryptocurrency exchanges like Mt Gox still loom large in many investors’ minds. Additionally, the complexity of managing a Bitcoin wallet, trading on largely unregulated crypto exchanges, local regulatory restrictions and lack of availability of Bitcoin on broker and wrap platforms has impeded adoption from traditional asset and wealth managers.

The future of Bitcoin as legal tender and as an investment asset will depend on a number of factors. A solid regulatory framework will help create a more transparent market and if more protections are offered to investors, more will be attracted to the market. In turn, this will build confidence in the cryptocurrency market and lead to greater pricing efficiencies. The treatment of capital gains from investments in Bitcoin will also catalyse the further development of the market. Lastly, confidence in the Bitcoin market will be improved if two disadvantages are properly addressed—namely, complexity and insecurity.

Solutions are now becoming available that can provide access to the powerful diversification and return potential of Bitcoin in a regulated, transparent and exchange-listed structure that is as easy to trade as any share of ETF.

Introducing BTCETC Bitcoin Exchange Traded Crypto (BTCE)

BTCetc Bitcoin Exchange Traded Crypto (Ticker: BTCE) is an exchange traded cryptocurrency (ETC) that tracks the price of Bitcoin.

The ETC is 100% physically backed by Bitcoin, it trades on Deutsche Börse´s electronic trading system XETRA, and is the world’s first centrally cleared exchange traded Bitcoin product [4], providing investors with one of the safest and most liquid ways to gain exposure to Bitcoin. Each unit of BTCE gives the holder a claim on a predefined amount of Bitcoin. 

An Easier Way to Invest in Cryptocurrency

Investing in BTCE is as simple as buying shares through your broker or bank.  Unlike investing directly in Bitcoin, there is no need to engage with the technical challenges of setting up a cryptocurrency wallet to store Bitcoin. Your units of BTCE are safely held with your broker or bank, thus removing the risk of losing your investment due to a lack of knowledge of how cryptographic keys work.

Invest in Bitcoin on a Regulated Exchange

BTCE is traded on XETRA, one of the largest exchanges in Europe. As Deutsche Börse is a regulated exchange, this means that investors can trade with confidence knowing that all market participants are strictly vetted and carefully monitored to prevent market abuse. The alternative is to buy Bitcoin on cryptocurrency exchanges, most of which are unregulated or do not have as strict security and compliance standards.

Ample Liquidity

The issuer has partnered with world-class liquidity providers and authorised participants (APs) to ensure ample liquidity, resulting in tight spreads on-exchange and the ability to create or redeem units of BTCE on the primary market.

Redemption for Bitcoin

BTCE can also be redeemed directly for Bitcoin. As an additional layer of protection for investors, every redemption transaction must be confirmed by the issuer and a reputable third-party administrator to ensure that no Bitcoin can be misappropriated due to misconduct or negligence on behalf of the issuer.

Safe Custody

The issuer stores the Bitcoin with BitGo Trust Company, a secure, regulated custodian, purpose built for holding digital assets.  Strict KYC and AML standards ensure that the provenance of all cryptocurrency in custody has been vetted.

BTCE is issued by ETC Group and marketed and distributed by HANetf. Past performance is not an indicator of future performance, and when you trade ETCs your capital is at risk.

Advantages of BTCE and Exchange Traded Bitcoin:

• Bitcoin exposure simplified: exchange-listed, regulated and secure
• Buying and selling BTCE is as simple as trading any normal share
• You trade through your regulated broker, on regulated exchanges with a central clearing mechanism
• You don’t need to manage a crypto wallet or trade on unregulated crypto exchanges
• You don’t need to manage cryptographic keys or blockchain technology

Risks of investing in BTCE:

• Like equities, an investor’s capital is fully at risk and you may not get back the amount originally invested
• Exchange rate fluctuations can also have both a positive and negative effect on returns.
• Past performance of Bitcoin is no guarantee of future performance. 
• The product may not be a suitable investment for all investors and each investor should determine the suitability of its investment in light of their own circumstances
• For a full, list of risks associated with the BTCE product, please consult the prospectus.

Bitcoin Trading vs Exchange Traded Bitcoin

Buying and storing Bitcoin has not always been easy, and many investors have been sceptical or scared of getting involved given teething problems within the cryptocurrency market infrastructure.

Here’s how BTCE provides a safer, easier and more familiar experience for mainstream investors:

Summary:

In twelve short years, Bitcoin has fundamentally altered the way we think about currencies and financial institutions, governments and businesses have accepted it as more than just an experiment. Bitcoin now facilitates real-world transactions every day and is beginning to be accepted by retailers both online and offline for payments. While no one can predict the future, Bitcoin has proved its utility and seems likely to find more supporters and applications as the market further matures. Now investors have the option to invest in Bitcoin, with the security of trading it on a recognised securities exchange.