Like Brexit, Bitcoin has polarised opinions across the globe. What started as the mainstay of crypto enthusiasts has now caught on with big boy financial players who are shuffling in to get a piece of the pie.
But opportunities to invest in Bitcoin with traditional investment firms remain distinctly limited for retail investors. Smaller investors mostly remain in the niche crypto community, holding out with a cult-like belief in the mainstream spread of Bitcoin, while hailing doom and gloom for traditional financial institutions. So as a retail investor, is it worth pumping your hard earned cash into the crypto balloon? And what are the investment opportunities for someone who wants to hold Bitcoin as part of their traditional SIPP pension?
In recent years pensions expert at Secure For Life, Tony Stevens, has been approached by clients who want to know if they can hold Bitcoin in a SIPP as part of their long-term investment strategy. Although there are currently very few avenues for mainstream investing into crypto, Stevens says there are some situations where cryptos could help hedge against traditional market loss.
“I’ve done quite a lot of research, and essentially, what it’s boiled down to is that there isn’t really much choice, in terms of bringing crypto into mainstream investing.
“I think people will also struggle to find advisors comfortable with advising on crypto, simply because of the volatility.
“It’s equivalent is like an unregulated collective. They’re very, very volatile, very risky. So they’d only be right for the right type of client in the right age category, with the right profile.”
According to Stevens, the ‘right’ client would be people who are young. If something goes horribly wrong, they’re able to recover from the loss before it impacts on their life. Investing in Bitcoin would also be for people who have higher levels of assets, or are high earners with financial stability and willing to accept significant volatility.
“It’s one of those places where you can make very good profits if you time the market right. But timing the market is an incredibly risky proposition to make. In terms of finding advisors willing to recommend it, people will struggle,” Stevens added.
If someone were to come to you and say, ‘I want to invest in cryptos,’ what would the process be?
Stevens said the first step for an advisor is to assess whether the client is suitable as an investor: “it’s the difference between advice, and audit taking.
“So, as an advisor, if I say, ‘I think you should do this,’ I need to genuinely believe that’s what you should do, rather than you coming and saying, ‘I want this,’ that’s an execution only process, and I don’t deal with clients like that.”
A scenario for crypto investing that’s not “unreasonable,” he said, is if a fairly young person with a good inheritance and £5-6 million to invest were to approach him and request exposure to Bitcoin within their portfolio.
“We would then have a conversation about the risks that are involved: you’ve got liquidity risk, you’ve got counter-party risk, you’ve got technology risk, you’ve got massive volatility risk.”
If the client was still comfortable with the level of risk involved, and Stevens felt the investment was at a level that wasn’t going to materially affect the client going forward, the research process would begin.
“You have two choices,” Stevens said, “to use a company that’s created the ETN, or you could book your money with a discretionary fund manager who would have access to hedge funds specifically.
“This would be one of the big players like BlueDolphin or Rathbone. Because of the size and scale that they have access to, hedge funds can build a portfolio that incorporates Bitcoin quite comfortably.”
But these options come at the significant cost of an additional layer of fees, usually anywhere between 0.5% -1% in a year. That may not sound like a lot in the context of Bitcoin’s volatility, but it’s double the cost of a traditionally managed fund. This makes a Bitcoin investment expensive compared to traditional mainstream products.
Given the volatility of Bitcoin, should you hold crypto as an investment?
“People are able to invest in crypto, but the regulatory protections that apply are considerably weakened. So if the provider goes bust, your money goes bust with it,” Stevens cautioned.
There are no regulatory hurdles to prevent investing into Bitcoin, but there are significant restrictions and very serious drawbacks to doing so: “If you were to put into Google, ‘invest in cryptocurrency,’ 95% of what comes up is going to be a scam.
“There are always inherit dangers. These houses that hold digital currencies hold them in digital wallets, and as we’ve seen from history, if someone breaks in, you’ve lost it.”
As a fixed quantity commodity, Stevens believes that crypto will remain a niche market and never truly be mainstream. But this doesn’t mean mainstream investors will stay out of crypto currencies: “I suspect the big boys are only really going to be interested in Bitcoin and Ethereum. I think those will be the two they’re interested in, certainly for the next 3 -5 years.”
Despite the drawbacks, the outlook for Bitcoin’s future seems to be bright: “Anything as widely accepted now as Bitcoin, and to a lesser degree, Ethereum, is only going to go in one direction. It will grow and expand and become more accepted as time goes on. These things have an inevitability to them. The question is, how will the regulation change to mitigate risk?”
Sovereign governments do not like a stateless currency. It presents significant systemic risk to them and their ability to issue currency and have other people buy it. However, significant strides have already been made in the regulation of Bitcoin.
If there were a financial crisis would there be any value in holding Bitcoin?
There’s one scenario where Stevens believes bitcoin could be a “safe haven currency,” – the advent of a financial crisis.
“I think you’ll see if there’s another global recession, the value of Bitcoin is going to significantly rise.”
This is because, like gold, it’s an asset that’s expected to do the opposite of what the mainstream does, and that’s how you hedge your investments: typically, when equities go up, gold goes down, and vice versa.
“People will want to buy Bitcoin because it’s stateless. It’s not related to production and GDP. It’s a safe currency because it’s affected by macro-economic factors in the same way as government backed currency. The value of Bitcoin isn’t related to the value of international trade. It’s dependent on what somebody else will pay for Bitcoin.
“There’s a very famous saying that goes along the lines of, ‘anything is only worth what someone else is willing to pay for it.’
“It’s an inevitable progression that crypto currencies gradually mature. But whether that’s 5 years down the road, or 10 years down the road, is anybody’s guess.”
Tony Stevens is an Independent Financial Adviser and the Head of Paraplanning at Secure For Life. He’s also a regular contributing writer for Online Money Advisor.