My answer: I’m enthusiastic about the blockchain technology that makes
Bitcoin possible. In fact, Vanguard is using such technology to
instantaneously update data like the share prices of companies in our index
funds. As for Bitcoin the currency? I see a decent probability that its
price goes to zero.
Are cryptocurrencies currencies?
Bitcoin’s creators introduced the cryptocurrency in the wake of the global
financial crisis. The goal was to bypass governments and banks when two
individuals want to transact. No country, company, or institution controls
the currency. But are Bitcoin and competing cryptocurrencies really
currencies? Let’s think about what a currency is:
* A currency is a unit of account.
Cryptocurrencies qualify, as they can measure the value of other goods and
* A currency is a medium of exchange.
I’d give cryptocurrencies a qualified yes on this point. Currently, only a
limited number of vendors globally accept cryptocurrencies, and recent
volatility will only discourage increased adoption.
* A currency is a store of value
. Bitcoin is not. Its price volatility undermines its adoption, as fewer
vendors will accept a currency whose value can fluctuate so dramatically.
The prices of newer currencies have been similarly volatile.
The existential dilemma
Let’s call the verdict on the currency question mixed. Even if
cryptocurrencies qualify for niche purposes, their prospects seem dubious.
The greatest threat is central banks, which have begun to research
blockchain-based currencies and impose regulations on exchanges. Given the
additional control and policy effectiveness that digital currencies could
provide, central banks have good reason to adopt digital currencies in the
coming decades. Those currencies would be “legal tender,” legally
recognized forms of payment for all debts and charges.
If the choice were between Bitcoin or a blockchain-based loonie, which
would you rather have in your digital wallet?
Cryptocurrencies as investments
The investment case for cryptocurrencies is weak. Unlike shares and bonds,
currencies generate no cash flows such as interest payments or dividends
that can explain their prices. National currencies derive their prices from
the underlying economic activity of the countries that issue them.
Cryptocurrency prices, on the other hand, are generally not based on
economic fundamentals. To date, their prices have depended more on
speculation about their eventual adoption and use. The speculation creates
volatility that, ironically, undermines their value as a currency.
Nor are cryptocurrencies a chance to capitalize on blockchain technology,
which is the method most cryptocurrencies use to record network
transactions and ensure their accuracy. Although cryptocurrencies are built
using a blockchain, they are not necessarily tied to the value of
blockchain applications that may improve the cost, speed, and security of
executing transactions or contracts. Bitcoin is an investment in blockchain
in the same way that Pets.com was an investment in the Internet.
For investors, adding some exposure to Bitcoin would mean reducing their
allocations to tried-and-true asset classes such as stocks, bonds, and cash
– the building blocks for well-diversified portfolios that can help them
meet their goals. With no cash flows and extreme volatility, the investment
case for Bitcoin is hardly compelling.
We are early in the development of blockchain technology. We’ll likely see
blockchain adopted by governments and enterprises for specific purposes in
the coming decades. As innovation quickens and competition increases, the
majority of networks (and their associated cryptocurrencies) may be
rendered obsolete, leaving many cryptocurrencies like tulip bulbs in
17th-century Holland – soaring to incredible heights before the speculative
And, unlike tulips, they don’t look very nice in a vase.
Joseph H. Davis, PhD, is a Vanguard principal and the global head of
The Vanguard Group, Inc.’s Investment Strategy Group, whose research and client-facing team
develops asset allocation strategies and conducts research on the
capital markets, the global economy, portfolio construction and related
investment topics. As Vanguard’s global chief economist, Mr. Davis is
also a key member of the senior portfolio management team for Vanguard
Fixed Income Group, which oversees more than US$700 billion in assets
Notes and Disclaimer
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
part by any means without prior written permission is prohibited. This
article first appeared on the “Insights" page of the Vanguard Group, Inc.’s website. Used with permission.
The views expressed in this material are based on the author's assessment
as of the first publication date (March 2018), are subject to change
without notice and may not represent the views and/or opinions of Vanguard
Investments Canada Inc. The author may not necessarily update or supplement
their views and opinions whether as a result of new information, changing
circumstances, future events or otherwise.
Certain statements in this presentation may be considered "forward-looking
information" which may be material, involve risks, uncertainties or other
assumptions and there is no guarantee that actual results will not differ
significantly from those expressed in or implied by these statements.
While this information has been compiled from sources believed to be
reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy,
completeness, timeliness or reliability of this information or any results
from its use.
This material is for informational purposes only. This material is not
intended to be relied upon as research, investment, or tax advice and is
not an implied or express recommendation, offer or solicitation to buy or
sell any security or to adopt any particular investment or portfolio
strategy. Any views and opinions expressed do not take into account the
particular investment objectives, needs, restrictions and circumstances of
a specific investor and, thus, should not be used as the basis of any
specific investment recommendation.
Please consult your financial and/or tax advisor for financial and/or tax
information applicable to your specific situation.
In this material, references to “Vanguard” are provided for convenience
only and may refer to, where applicable, only The Vanguard Group, Inc.,
and/or may include its affiliates, including Vanguard Investments Canada