It should be remembered that investors sit up and make enquiries when something they haven’t got exposure to starts to make a lot of money – the so-called ‘investor greed’ factor. 
The temptation to get involved based solely on past performance is very strong despite understanding very little about it. This has been a common feature with all historic bubbles, all of which ended in disaster, although some investors made a fortune along the way.
It is very easy to take the intellectual high ground, scoff and discount cryptocurrencies as a passing fad but some did that with the internet before Amazon was born.
It is also similarly very easy to get consumed by greed and influenced by others who have profited and climb aboard.
Keeping the facts simple, bitcoin is a virtual currency, a little like gold, where intermediaries play a very limited role and central banks and governments none at all. The ledger of who owns what is encrypted and uses ‘blockchain’ technology which is basically an ever-expanding database comprising of a series of blocks of data which are linked.
This feature, where banks and governments are bypassed is probably the single biggest reason why it is unlikely to succeed. At the moment, any transactions involving a cryptocurrency cannot be monitored and completely bypass any regulations or security and exclude banks.
Controlling the money supply is a key part of the role of the Bank of England as we have seen with quantitative easing.
Jamie Dimon, chief executive of JP Morgan has labelled ‘bitcoin’ a fraud but as a banker he would do that, wouldn’t he.
Prevention of money laundering and cybercrime is an increasing concern for the regulatory authorities and we have a plethora of regulation being implemented at the moment and next year which seeks to address this.
Cryptocurrencies such as bitcoin cut straight through all this regulation and control and this is why they are currently the preserve of illicit trade such as drug trafficking.
For the time being, we are watching closely but currently have no plans to consider cryptocurrencies as part of our investment universe. It is possible it could become outlawed by the authorities.
Performance of bitcoin over 1yr
Source: XE.com
The golden rule of investment is to understand what you are buying.
We cannot currently sufficiently analyse cryptocurrencies and the underlying technology to an acceptable level and will only seriously consider it when we can or when it falls within a regulated environment.
Guy Stephens is technical investment director at Rowan Dartington. The views expressed above are his own and should not be taken as investment advice.