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Digital assets

BITCOIN HAS HALVED - WHY HAS THE PRICE NOT COLLAPSED?


Digital assets, blockchain and distributed ledger technology (DLT) are here to stay. When asked to talk about these issues all too often I am greeted with blank stares. Let’s face it, the jargon doesn’t sound very sexy and there is a lot of negative press out there.

 

When I mention digital assets, a common response is “oh, you mean bitcoin”. The reality is that the new sector’s scope is much wider but perhaps I’m being harsh. Bitcoin was after all the first digital asset and my initial industry exposure dealt with clients who had purchased bitcoin early on – or maybe one or two of the other pioneer “cryptos” such as ether or ripple. I thought it timely to look at bitcoin again, particularly as the big news is that it has “halved” this week. But the price is stable so what has halved exactly?


Bitcoin was released in 2009 by the highly secretive Satoshi Nakamoto, whoever he, she, it or they may be. No-one knows. From the outset, the total number of coins that could ever be issued was limited to 21 million. No ifs and buts. Eleven years later, almost 18.4m are in circulation.


New coins are released under a process known as mining. Computers worldwide are set to work verifying all bitcoin transactions. They ensure that any purchase or sale is added to a ”block” and safely stored. The system would unravel if this work was not done and in exchange for allowing their computers to complete it, the owners, or “miners”, are rewarded by the issue of yet more bitcoin. For the last four years, 12.5 new coins were released every ten minutes or so, or some 1,800 daily.


On 11 May 2020, the reward per block was halved to 6.25 bitcoin. It follows that from now on just 900 bitcoin will be added to the supply daily. The increase in value added to the market every 24 hours will be some US$8.1m (900 x c. $9,000 which is the present price per coin). In approximately four years’ time, the halving will happen again to 3.125 and so on – specifically every time 210,000 new blocks are reached. This constant halving means that the last of the 21 million “coins” will not be mined until about 2140.


Digital assets can be expressed in fractions and it is possible to acquire a small “part” of a bitcoin – although beware of transaction fees. Bitcoin is broken down to eight decimal places. The eighth place represents one hundred millionth of a bitcoin and is referred to as a satoshi – a nod to the creator’s name. A single satoshi or 0.00000001 BTC is thus worth approximately US$0.00009 today.


Halving therefore has nothing to do with the underlying price. The bitcoin story continues and some have made a great deal of money trading it. To me, it is not an investment in the traditional sense for there is no asset underlying a bitcoin in order to value it properly. Nevertheless it has a global following and we may see increased volatility in its price as a result of May’s halving.


Common sense dictates that the reduction in daily supply growth should result in a price rise. Indeed this happened after the last two halving events both four and eight years ago. But bitcoin does not follow the normal rules and anyway we are living through extraordinary times. Nothing is certain –caveat emptor indeed.  


And so to the wider picture.  At a recent webinar, I took part in a fascinating discussion on fund raising in the US energy sector by way of tokenisation. Using blockchain technology, tokens are a way of owning assets akin to fractional ownership. In the case I was being shown, for a mere US$500 one was promised a share in energy assets that are normally out of reach to the general public.


The ability to tokenise ownership of a vast range of underlying assets is hugely exciting and the potential is massive. To sound a cautious note, as with all new things, there are ne’er-do-wells around who are all too willing to exploit the unwary. Normal caveats apply and doing your own research has never been more important. But for those unable – or unwilling – to tie up spare cash in a single asset, diversifying a portfolio using tokenisation may well be the way forward in the future.


I will upload more pieces on digital assets in the weeks to come. Whilst I cannot speak for the suitability of individual investment opportunities, this is a fascinating new field; get in touch if you’d like more information or guidance.


12 May 2020


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