12th February 2021
We are frequently asked about our views on bitcoin and cryptocurrencies in general. This will not be a long pseud-ish piece in which I attempt to demonstrate how much I know about bitcoin (I’d only embarrass myself) while simultaneously humblebragging about how much bitcoin I own (I do own some for educational purposes, but selling it now wouldn’t keep me in BrewDog Elvis Juice beyond the end of the month) – but I do want to lay out the principles we use when assessing whether the rise of cryptocurrencies should inform our investment process.
Last week I ended our weekly missive by alluding to Dogecoin, a cryptocurrency invented by two blokes who thought they’d use “memes” to their advantage. The combination of a perplexed looking dog and a digital currency has since perfectly captured the zeitgeist – appealing to the younger (i.e. sub baby boomer) technologically savvy investor who wants to cock a snook at the establishment. Elon Musk, the hero for this generation, recently had some fun on Twitter by mentioning the coin, which has since added a casual few billion to its market cap. But it would be foolish to disregard all cryptocurrencies as similar curiosities, destined, like GameStop, to bring horrible losses to the revolutionistas. The rise of bitcoin (current market cap c. $650bn), is a symptom of something we have talked about a lot: a breakdown of trust in the world’s monetary authorities. In this regard, it justifies our longstanding enthusiasm for gold.
For us bitcoin is both an asset and a currency. It must be an asset as HMRC demands tax be paid on capital gains, which it doesn’t ask for with ordinary currency. Otherwise the parallels with gold are obvious. Gold is money. When SAS soldiers go behind enemy lines, they are given gold coins for use in an emergency. Fiat currency wouldn’t do: first of all – what currency should they be given? Gold is universally accepted as a store of value that can be exchanged for goods or paper currency as required. When we talk about diversifying our Funds beyond sterling, it makes sense to consider gold (and silver – see last week!) as part of that diversification. Should we be doing the same with bitcoin?
Thankfully, the easy answer is “no”. First, we run daily-dealing open-ended funds. Currently, there is no appropriately-priced vehicle for us to hold bitcoin or any other cryptocurrency. Second, do we need to? We believe gold will do a more than sufficient job at expressing our distaste with the constant debasement of sterling, dollars, euros and yen by central banks in cahoots with highly-indebted governments and prepared to print endless amounts of currency. Gold might not capture the anguish and intergenerational ire felt by a large number of 20-somethings who feel disenfranchised from society, but it has been accepted as currency for millennia and is far less volatile.
We respect our peers at Ruffer hugely – we noted their recent investment into bitcoin with interest. They described the investment as similar to insurance. I think that describes an investment in bitcoin very well – like an insurance premium, the money spent could be poured down the drain, but equally when needed it’s worth a multiple of what you paid. But as well as wanting to diversify our Funds away from investments denominated in fiat currencies, we also like owning assets with margins of safety. With gold, the equities of the miners happen to offer abundant margins of safety and are among the cheapest companies listed on public equity markets. Any investment in bitcoin, were we able to find a way to do it appropriately, would be a pure call on a currency.
The bitcoin industry speaks of coins being “mined” and gold features prominently with bitcoin imagery. That speaks volumes. For us, gold (and silver) provide us with ample ways to express our view that distrust of central banks and their endless supply of fiat currencies will only grow. And if our clients choose to hold a small part of their wealth in bitcoin – that is their prerogative. I’m not sure they’d appreciate us making that call for them! Nor, I suspect, would an SAS soldier appreciate being given a USB stick and a 10 character random password to remember, and being told: “there’s your ransom money”.
We’ve been busy as usual this week – investment trusts are high maintenance little beasts. Premia and discounts ebb and flow and we try to add as much value as we can by taking advantage of this volatility. The IPO window is also well and truly open, and brokers are enthusiastically encouraging us to back the latest yield-generating thematic must-have. We’d rather not pay £1 of our clients’ hard-earned for 98p of assets in a cash shell, thanks. We also introduced a new open-ended fund across all 3 of our Funds this week, investing in CIM Dividend Income – an Asian equity income fund run by the very experienced James Morton that, like our own Funds, reaches parts of the market others don’t! James has constructed a portfolio that yields 6% and trades at a single digit earnings multiple. This is the sort of valuation that excites us. One day, when Dogecoin stops going up 10x in 2 weeks, and Tesla isn’t worth 2,000x earnings, others will be excited by this too, and we’ll be looking for the next part of the market that is being ignored.
Ben Conway – Head of Fund Management
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