Bitcoin: Big change or loose change?

cryptocurrency bitcoin asset class

The following post is courtesy of Lilian Chovin, Investment Strategist at Coutts.

Bitcoin was all over the place this week – and not just in the media. It reached an all-time high by breaking through the $11,000 mark but then fell by 20%. Its sharp rise brought back memories of the dotcom bubble back at the turn of the century, and Bank of England deputy governor Sir Jon Cunliffe has said investors should “do their homework” if considering it.

Is Bitcoin part of a tech bubble?

Our view at Coutts is that, as an investment asset, electronic currencies like Bitcoin have nothing but sentiment backing them up, are vulnerable to government sanctions and lack the kind of data we look for to gauge value. We therefore have no current plans to include them in our investment strategy.

In our view the development of blockchain technology, which sits behind so-called ‘cryptocurrencies’ like Bitcoin, is a far more interesting area to watch. This new technology has the potential to disrupt any field where there’s the need for secure, transferable records.

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. It has risen by around 35% in US dollar terms which is almost double the return from US equities.

Indeed, we saw some profit taking in technology shares last week, with the Nasdaq Composite falling by over 1% – its largest fall since the summer.

But we believe this is merely a short-term pause in performance, probably brought on by the progress of US tax reforms through Congress. Generally, the technology sector is still good value. Innovative trends such as artificial intelligence and driverless cars, a strong set of Q3 results and a robust economic backdrop have supported earnings growth expectations, and it remains a preferred theme for us.

ECB can take comfort in latest data

Eurozone inflation increased slightly from 1.4% to 1.5% in November while the region’s unemployment rate dropped to its lowest level since early 2009. Core inflation, stripping out volatile energy and food prices, was flat at 0.9%.

The news supports the European Central Bank’s (ECB) cautious approach to scaling back its bond-buying scheme set up to support the economy after the financial crisis. From January, the central bank is going to buy €30bn of assets every month instead of the current €60bn – a sign of its returning confidence in the recovering European economy.

We have a longstanding preference for European equities which have made solid gains so far this year.

Rising inflation remains a real risk to the purchasing power of our clients’ cash, as shown in the latest edition of the Coutts Luxury Price Index. The index shows that high net worth individuals face fiercer price rises. While inflation on luxury goods and services dropped sharply in the last six months to 3.6%, it remained above mainstream inflation which stands at 3%, as measured by the Consumer Prices Index.

Oil production to stay slow next year

The Opec group of energy producers met in Vienna and agreed to extend its oil production cuts until the end of next year to further bolster prices.

Since production cuts began in January, the price of a barrel of Brent crude oil has risen from about $50 last year to more than $60 today. Market reaction was muted as the decision to extend production cuts was widely anticipated.

At Coutts we are broadly neutral on oil and still see oversupply as an issue – although demand has been strong because of synchronised growth across major economies.

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