At the moment investor news is flooded by the Bitcoin phenomenon. Bitcoins were the first decentralised digital currency, which were created in 2009 following concerns for the global banking system after the financial crisis. The price of bitcoins took nearly 5 years to break through $1000 but has recently exploded in value and now fluctuates by $1000 in a matter of hours.
Bitcoins are essentially a string of computer code. They cannot be printed by a central bank and are instead “mined” by computers solving a complex mathematical problem that unlocks its security. Every 10 minutes the miner who solves the problem is rewarded with 12.5 bitcoins. The number of bitcoins rewarded started at 50 and halves approximately every 4 years, up to around 2140 when the last bitcoin will be mined. This means there is a limit of 21m bitcoins that can exist. Transactions in bitcoins are only confirmed at these 10 minute mining occurrences. The transaction history of a bitcoin is known as the blockchain and confirms the current owner of a bitcoin.
So should we consider bitcoins as an investment? For us, an investment has to be based on certain fundamentals such as its ability to generate an income – without this one cannot calculate an intrinsic value. On this basis we do not consider bitcoins to be an investment. Indeed, the incremental buyer of bitcoins now seems to be motivated by the fear of missing out and desire to make a quick gain, rather than concerns about the financial system and traditional currencies. This has all the hallmarks of speculation, not investment.