Note: Cryptocurrencies are currently the subject of huge interest, particularly amongst "the young." Direct investment in Bitcoin itself is currently unregulated but given recent developments in the industry (ETFs, regulation), that might change in the near future.

This article by Archie Hamilton is an interest piece. It does not constitute investment advice. Anyone who wishes to act on the information contained within this article does so at their own risk.

Please note this original article was written in November 2020 and revised in November 2021. We will be writing a follow-up to reflect the current situation in January 2025.

I have been sitting on this article for over a year (as of November 2021). As with wider public opinion there has been scepticism from some of the Hamilton management team around cryptocurrency and therefore whether or not it is our responsibility to expose our clients to it.  Now that Bitcoin is back making all-time highs (November 2024), I thought it was about time to get it out there.

De-fi, stablecoins, dApps. Unless you’ve been living under a rock for the last year, I’m sure you have heard of Bitcoin and the mysterious world of cryptocurrency.

What is it, why is it important and what is the future of this brave new world?

I first started looking into cryptocurrencies back in 2011. Ed Pagecroft (CEO of Stockopedia) and I exchanged some messages one night (in China) and day (in sunny Oxfordshire) – what was it, why was it, should we get involved?  This was during Bitcoin’s first mania stage, when the price grew from under $1 to over $15 in just 3 months.  At some point around that time, I even downloaded the mining client and ran it for a few weeks. It overclocked my 5-year-old Macbook Pro so horribly (heat and fans were off the charts) that I stopped, but I had successfully mined a few BTC by then. If you are wondering what happened to those BTC since then. Well, I am too., Many BTC were lost during those early days by people (like me) who didn’t believe it would ever have significant value, and so didn’t do the work required to secure the coins in a cold wallet.

The arguments for the merits of a decentralized digital currency have been raging since the very beginning. You can read a thread from Slashdot from back when Bitcoin achieved dollar parity back in February 2011 to see that the pro and the con camps are still fighting the same talking points.

So it is a store of value?  A hedge against inflation?  A digital currency just waiting to go mainstream?  A hoax?  A drug dealers anonymous payment system?

We are now quite far advanced along the third major up-leg of what we can simply call the Bitcoin (and more broadly the cryptocurrency) market expansion.  What started as a mysterious announcement by the (still) enigmatic Satoshi Nakamoto has devolved into 100’s of different ways to use blockchain technology.

At its core, blockchain is very simple. A decentralized, distributed and oftentimes public, digital ledger consisting of records called blocks that is used to record transactions across many computers so that any involved block cannot be altered retroactively, without the alteration of all subsequent blocks.  In simple terms, everyone knows what everyone else is doing.

So let’s start with Bitcoin, because it is the biggest ($1.3T in market cap – November 2021) and because it is the easiest to understand. 

Successful currencies tend to have the following key characteristics: durability, portability, divisibility, uniformity, limited supply, and acceptability. For more on this, you can listen to this podcast over at the St. Louis Fed.

BTC scores well on all 6. For me, the most important of these is limited supply. There will only ever be 21 million BTC in circulation, so crucially, there will never be inflation, something that cannot be said for Fiat currency and central banks.

As an insight as to what a medium-term end game might look like, since I started this essay, El Salvador has made Bitcoin a second official currency. Although there is a lot of doubt about the El Salvadorian President’s intentions, the fact that a country has installed BTC ATM’s all over the country and obliged all businesses to accept it as legal tender is a huge test case for the biggest cryptocurrency.

But Bitcoin is just the tip of the iceberg.

There are literally thousands of other cryptocurrencies that have launched since Bitcoin debuted in 2009.  The second biggest of these is Ethereum, which was introduced in 2013. It was the first to introduce smart contracts, which allow for systems to run on their own without any external influence.  While Bitcoin decentralizes finance by cutting out the middleman, Ethereum aims to decentralize absolutely everything.  It’s a general purpose blockchain and could be compared (in the internet world) to Amazon Web Services - a white label product that powers its environment. There are thousands of digital apps (dApps) that have built on Ethereum’s blockchain – from Opensea (an NFT marketplace) to Uniswap (an innovative decentralized exchange where  the individual can exchange one cryptocurrency for another with no centralized middleman).

Imagine a single protocol running the pipes of the internet and charging every single player for every single transaction that occurs. That’s Ethereum’s value to a large section of the cryptocurrency ecosystem. 

And it is exactly this kind of dominance that leads to the next layer of the onion – layer 2 scaling solutions and ETH alternatives.  The slow nature and high fees of Ethereum have led to the development and deployment of a raft of so-called “Ethereum killers”.  Matic, Polkadot, Cardano, Arbitrum, and Solana - a token that has risen a staggering 17,500% in 2021 alone, mostly due to the fact that it has demonstrated that it is actually ready to compete with Ethereum in the real world.

I could go on for days about all the different use cases - and I will write more if there is demand, but for now, let’s talk you through how to dip your toes into this market. To repeat, this is not financial advice, just a recounting of my experience over the last few years.

Firstly, the outlook.

If history is any guide (and I believe that it is) then we are about to enter the final, parabolic stage of the 4th bull cycle in BTC’s 12-year process (November 2021).  I think that prices could well double or triple in the next 2-3 months (depending of course on your choices).  Common consensus is that this bull run will end in mid-December through Q1. Over the last few days, the market has dipped markedly. Some are saying this will be the last opportunity to buy BTC under US$60k (2024 note: these predictions aged both well and badly – the peak of the 2021 bull was in November and it has been possible to buy Bitcoin for as little as US$17k since). 

Rather than trying to time the market, I personally believe that having price targets is better.  I will be selling when BTC hits certain milestones, and holding what’s known in the nether regions of the community as a “suicide bag” in case the prices really go stratospheric

Of course, none of this may come to pass.  The total market cap of crypto is almost $3T, and there is considerably more institutional support than there was before.  But this is the feeling of my brain trust and I.

How to get involved

For the average Crypto investor, you really have to know what you are doing and so I would not recommend investing directly unless you are really comfortable with complex trading platforms. I would be happy to share my experience in a one-on-one environment, but would not make any recommendations.

What you might be better doing is to invest in an Investment Trust such as the Ethereum Classic Investment Trust or the Bitcoin Investment Trust – more can be found HERE. In this way, you are getting some Crypto exposure without the complications associated with holding the actual digital coins themselves, e.g. buying, holding, storing and safekeeping. Alternatively, find a stock (or stocks) that themselves have exposure to crypto. Grayscale Investments (that owns the trusts above) and Microstrategy are two such stocks (2024 update: Microstrategy (MSTR) is up 500% in 2024)..

So there you have it – part 1 of my adventure in Crypto.  To repeat, this is not investment advice: do your own research, accept that investment in Crypto is not without risk and only play with what you can afford to lose.

Archie Hamilton November 2021