Education: Bitcoin and Digital Currency

What is Digital Currency?

One of the main challenges people face in a new market like this is understanding the underlying asset. Fortunately, Bitcoin and Digital Currency are reasonably simple concepts.

The true and original purpose of Bitcoin was for it to serve as a peer to peer cash payments system. Bitcoin can be used to buy and sell goods online and has the added advantages of being low in transaction cost and operated by a decentralised authority (the people) rather than any central bank. Like any new technology, Bitcoin has faced it’s challenges; the largest of which is scalability. However, with the application of improvement “upgrades” like Segwit and what are known as “second layer solutions” like the lightning network, this challenge is being and continues to be addressed.  In the past 12 months alone we have seen dramatic improvements in network processing capacity and a significant reduction in fees.

Throughout the evolution of money from the barter system (3000 BC) through to coins (600 BC) and then paper money (1200 AD) right up to today’s mobile payments and virtual currency we have seen significant gains in scale and utility. With each evolution, achieving ubiquitous adoption takes time and we are only now seeing digital currency adoption really take off. In our opinion this presents an exceptional investment opportunity.

Digital Store of Value

Despite being volatile, Bitcoin has experienced an impressive price appreciation trajectory during its first 10 years of existence. It is also a fixed supply asset, with a total cap of 21 million Bitcoins to ever be created. In a world where central bankers are cutting interest rates to zero and undertaking massive quantitative easing programs (essentially printing new money), dramatically devaluing their national currencies, investors are increasingly looking for a secure and reliable alternative to traditional financial system assets in which to store their wealth. That alternative has come in the form of a border-less, highly portable, immutable and deflationary digital currency known as Bitcoin.

Digital Gold?

Previously, many have looked to Gold to fill the “store of value” role discussed above but there are obvious challenges with acquiring, storing and transporting gold. Think how easy it is for a citizen living under an oppressive political regime to have their gold confiscated from them when they attempt to cross their border or emigrate. Or less dramatically consider capital controls – where citizens are forbidden from freely moving their wealth offshore when their local economy struggles due to mismanagement. Wealth migration (China is one example) and as a hedge against inflation (Bitcoin purchase volumes have dramatically increased in places like Venezuela) have been enormous sources of demand for Bitcoin as it is deflationary in nature, highly portable and not subject to capital controls.

With the globe arguably teetering on the point of another financial crisis, it is not difficult to imagine a world in the not-too-distant future where digital currency and Bitcoin become a very appealing investment alternative to the traditional financial system. It is also not difficult to imagine with Bitcoin’s amazing growth to date that we will start to see sovereign wealth purchases by governments and central banks around the globe.  Given the limited supply nature of the asset, such activity could drive the price of Bitcoin significantly higher; to something that we might have trouble conceptualizing in the present day.

As a consequence of the above, we see a very justifiable position for holding a small portion of digital currency in more traditional portfolios. With this potentially being the greatest transfer of wealth of our lifetime, can you afford to have zero exposure to this asset class?

Here at Cloudbreak, we live and breathe digital currency. We understand the drivers of value better than anyone and utilise this expertise to identify the strongest investment opportunities for inclusion in our portfolios. These opportunities are closely tracked and re-assessed by our team of analysts on an ongoing basis with monthly adjustments being made in order to provide optimal returns.