Mark Ward, head of trading at Sanlam UK, said: “What a Bitcoin (and its rivals) is, can be thought of just as virtual money, used to buy and sell items, as you would in a shop with a five pound note – they are simply a means of exchange – it allows barter to occur online, in a virtually fraud-proof way. Whereas a central bank stands behind and stabilises traditional currencies (in the past one could exchange notes for gold should you ask the Bank of England, and UK bank notes still contain a “promise to pay the bearer” from the UK government itself), there is no bank, corporation or government acting as a backbone to Bitcoin. This is why the value of cryptocurrencies are so volatile – its value derives from the confidence in the market that tomorrow, the Bitcoin will not be worthless.
“Bitcoin is not truly a currency, at least not yet, and is best thought of perhaps as a commodity. The Dutch Tulip Mania in the 1600’s saw the price of a special type of tulip bulb rise to more than the cost of a house with an acre of land in the Netherlands, yet the intrinsic value and usefulness remained essentially nothing. But, as with cryptocurrencies, if people decide something has value, then it has value, and only time will tell if Bitcoin is another tulip-mania in the digital world, or will deliver on its promise to displace central banks and hard cash as the primary means of exchange in the future.
“One question that we often get asked at Sanlam is – “I don’t know how to mine Bitcoin, I don’t actually want to use it as currency, but I want exposure to it”. The easiest way to gain exposure to Bitcoin would be via an Exchange Traded Fund (ETF). That said we do not recommend Bitcoin as part of an investment strategy, as it has many characteristics of a bubble and something that we view as purely speculative.
“As for the future of crypto-currency, it largely comes down to three factors: whether or not Central Banks and governments release their own versions and make them the only legal tender, on indeed officially endorse a crypto-currency like Bitcoin, whether or not transaction processing speeds up from the current average of four days, and if the price volatility can be stabilised.
“Whether Bitcoin falls to near-zero like the aforementioned tulip, continues to rise like diamonds have over the past century, or simply holds steady once the market finds the level it can tolerate, is anyone’s guess at the moment, but it is certainly one to watch as it becomes better understood by the mainstream.”