This time a year ago, the value of one bitcoin was hovering just above the $700 (£521.4) mark; it is now sitting north of $12,000.
Its meteoric rise has made the market nervous, but the recent government announcement about regulating bitcoin is a clear sign that it is here to stay.
However, the question is whether the advisory market can be convinced en masse that it will be a good place to put their clients’ money.
The rise of bitcoin, a cryptocurrency and worldwide payment system, has been so stratospheric that investment experts fear it is a bubble waiting to burst.
Ben Willis, investment manager at Whitechurch Securities, said: “At the moment it is gaining significant attraction, which leads us to be very nervous about it because it has become a bit of a bubble and the price has been very volatile.
Key Points
Bitcoin currency has soared to above $12,000.
Advisers are getting more approaches from the public about bitcoin.
The Treasury's decision to regulate it has given the cryptocurrency more longevity.
“It is very speculative. But I do think that the whole viability of cryptocurrency – because of the way it is independently audited on a blockchain, the way you can transact and how many people have adopted cryptocurrency as payment – can only increase."
Public interest means advisers are getting more approaches from clients who want to talk about cryptocurrency.
During IFA events, Mr Willis said, they have been asked about cryptocurrency and what they should be telling their clients.
Mr Willis added: “Any good adviser should have some understanding of the risks involved. It is perfectly fine to have some of your money on a speculative asset like bitcoin, as long as you have all of your investments covered in a good old-fashioned way.
“It does not form part of our investment strategy. But you cannot ignore bitcoin because of the blockchain technology and what it offers: providing an independent digital ledger that is secure for transactions. The growth of the cryptocurrency and the fact there are more outlets accepting it means there is mileage. What's worrying is how much speculation drives up the price."
Guy Stephens, investment director at wealth manager Rowan Dartington, added: “Advisers should alert [clients] to the dangers and suggest an [exchange traded fund] on an execution-only basis. But it is pure speculation as to the value, which cannot be measured by any intrinsic value calculation.”
The rise in the value of cryptocurrency has reached such a level that the Treasury has now confirmed it wants to regulate the market. It is negotiating amendments to the 4th Anti-Money Laundering [EU] Directive that will bring virtual currency exchange platforms and custodian wallet providers into anti-money laundering and counter-terrorist financing regulation.
This is intended to result in these firms’ activities being overseen by national competent authorities for these areas.
Responding to a recent parliamentary question on cryptocurrency, economic secretary to the Treasury Stephen Barclay said: “The government supports the intention behind these amendments. We expect these negotiations to conclude at EU level in late 2017/early 2018.”
Hence, the Treasury has reinforced the viewpoint that bitcoin is no longer a flash in the pan.
Mr Stephens said: “Cryptocurrency is a technological evolution of the digital era but cannot be allowed to usurp normal currencies for reasons of tax and money-laundering.
“The industry is starting to take it seriously and the authorities will act if and when it starts being offered as an alternative means of payment in the broader economy.”
Nicholas Gregory, chief executive at CommerceBlock, a firm that develops technology to trade bitcoin, added: “Most people involved in bitcoin want regulation. [The Treasury plan] has given it recognition.”
Regulation could mean anyone wishing to provide a bitcoin exchange service will need a licence and will need to conduct money-laundering checks on their clients, just as occurs with any other regulated practitioner offering a regulated service to clients, according to Mr Stephens.
This will then move bitcoin and other cryptocurrencies into the similar world of other commodity trading, such as gold bullion or currency dealing. But how and if regulation works will depend on what the government does.
Some believe regulation will make the market less volatile while others are not sure about the full impact.
Mr Stephens added: “At the moment, anyone can simply sign up online and off they go – no paperwork, no checks, no admin. As soon as some form of process is introduced which causes some thought with some risks spelled out, then potential speculators think twice. In addition, the money-launderers will disappear.”
Mr Willis said: “If there is nothing they can do on the price, maybe there will be restrictions on how much you can buy – but they cannot do that either.
“It will be interesting to see how they regulate it and what they expect to do it with it.”
Andrew Wilson, co-founder of Lockhart Capital management, said he did some research into bitcoin before setting up his latest venture earlier this year. He has not ruled out looking more seriously at bitcoin in the future.
Mr Wilson said: “You do have to decide what it is; whether it is a security, currency or whether it is a collectible.
“But there is no reason why some time in the future, if taxed properly, it should not be considered. It needs to be properly regulated and taxed. You also need to establish price discovery.”
Banking firm Coutts has said bitcoin's sharp rise brought back memories of the dotcom bubble, while the Bank of England deputy governor Sir Jon Cunliffe has told investors considering it to “do their homework”.
Lilian Chovin, investment strategist at Coutts, added: “Our view is that, as an investment asset, electronic currencies like bitcoin have nothing but sentiment backing them up. [They] are vulnerable to government sanctions and lack the kind of data we look for to gauge value."
The bank is more interested in the development of the blockchain technology that sits behind bitcoin. In its view, the technology has the potential to disrupt any field where there’s the need for secure, transferable records.
Ms Chovin added: “Bitcoin’s ups and downs feed into a wider potential concern about the technology sector being in a bubble. This concern has been fuelled by the fact that technology has been a significant outperformer this year in the US."
Changes are clearly afoot with cryptocurrency once the Treasury gets hold of it. And only time will tell if the vast number of sceptical advisers can be convinced it is a viable investment.
Mr Stephens said: “A golden rule of investing is to understand what you are buying. Fund managers are avoiding it for similar reasons, it would be foolhardy to do otherwise.”
Ima Jackson-Obot is a features writer at Financial Adviser
