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Investing in Bitcoin and Black Friday

08 December 2017

Should investors buy Bitcoin?

The crypto currency Bitcoin is up over 900% this year [1] and is attracting a lot of interest in the media. Examples of its new found popularity include experts on Radio 4 referring to it as a 'new asset class', and the Chicago Mercantile Exchange planning to start trading a futures contract on the 11th of December. There are said to be over seven hundred different crypto currencies but Bitcoin is the biggest with about $160 billion [2] worth of Bitcoin in issuance: bigger than all bar three of the companies in the FTSE 100 index. With that scale in mind, it is important to think about the impact of these new currencies.

Typically, we try to predict currency moves by looking at the balance of payments, interest rate differentials and purchasing price parity. As Bitcoin is neither associated nor legally attached to any region or country, there is no balance of payments. There is no interest rate applicable. While it is accepted as payment in some places, it is not widely enough used to say what the purchasing price parity is. So what drives the price? It appears to be purely a case of supply and demand. The supply is limited by the computer programme that created it; digital miners who create the currency use electricity said to equate to the total consumption of Ireland, consequently meaning that it is expensive to create and is limited in supply. Demand is driven by speculation. Buyers buy on the hope that more people will want to get in. The fact that transactions cannot be traced means that it is a favoured means of exchange for the criminal fraternity; hackers for instance have demanded ransoms paid in crypto currency.

The volatility in crypto currencies makes it difficult for them to be used to buy goods and services. For example, on Wednesday Bitcoin rose 14% against the dollar, before dropping 21% and then ending the day flat. [3] While crypto currencies may be the future one day, they are not there yet. For now, they look like a classic bubble where early buyers who take profits are the winners at the expense of later investors. Early buyers are sitting on huge paper gains (or should that be crypto gains) which can only be realised if demand continues or the currency gains wider acceptance. As with the tech bubble, there may be winners and losers but a shakeout in the market may be the way to a more stable path and greater acceptance. We have no way of knowing where or when this bubble will burst but for now "caveat emptor" buyer beware.

[1] Bloomberg, [2], [3] Bloomberg

What impact does Black Friday have on spending?

Black Friday is the Friday after Thanksgiving when many people in the US take the day off and go shopping whilst retailers compete to offer the biggest discounts. In the UK, we initially took little notice of this up until a couple of years ago when our retailers seemed to adopt the practice despite our lack of a bank holiday. Like Father's day and Halloween, UK retailers have not been slow to follow our transatlantic colleagues in order to drive more sales. The Monday following Thanksgiving has become Cyber Monday and this name gives us a clue as to who has driven its promotion. Simply more people than ever are shopping online. Amazon dominates this space with a 55% share of online transactions on Black Friday this year [1] - six times their nearest rival Walmart. In the past the New Year sales were the big shopping event of the season then gradually sales have started before year end and even before Christmas and now with Black Friday and Cyber Monday the shopping season is moving earlier and from the high street to on-line shopping. Discounting is the order of the day.

This is likely to impact shopping statistics as Christmas shopping moves from the December data into November making interpretation of year on year data harder. The bigger trend is to online shopping and this has further to go. As more shoppers move online, competition increases as consumers have access to more choice, comparison websites, reviews and, most importantly, there is price transparency. Our high streets and shopping centres are being hollowed out. Distribution and delivery systems have become more important with Amazon driving delivery times ever shorter to satisfy customer need. Price rises are harder to implement for most goods and this is keeping inflation low and may squeeze retail margins.

The internet is changing the way we do business and, as investors, it is vital that we understand these trends. Retailers and producers who are not adaptable will suffer while others will flourish in this new environment. Competition will be undoubtedly be fierce and it looks like a winner-takes-all scenario is emerging.


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