Australian investors looking to diversify their portfolios may take a look at cryptocurrency, which could be on the verge of another bull market.

Bitcoin (BTC) is the Grandaddy of digital currency and is even starting to challenge gold for investor interest, albeit as an early-stage competitor.

Dan Held is a crypto-currency expert and business development director for San Francisco-based Kraken, an exchange that trades Bitcoin.

“The new asset class – crypto currencies or crypto assets — hasn’t been around for very long, only since 2008,” he told Stockhead. “It’s a very new industry.”

The percentage of the world’s population that own Bitcoin is still very low. Bitcoin’s low market penetration could work in its favour as it shows the market has yet to reach maturity, Held said.

In the US and Europe there are higher rates of ownership at about 5 per cent of the population, but — despite large institutional investors, banks and hedge funds beginning to look seriously at Bitcoin — this is lower than ownership rates for older asset classes, like equities.

The crypto currency market is valued at $US300bn, and Bitcoin is roughly $US180bn of this.

The ‘halvening’: the start of Bitcoin’s new bull market

Held said Bitcoin typically has a four-year market cycle — a boom and bust cycle, if you like.

This is related to the halving, (pronounced halvening), event for Bitcoin that happens approximately every four years, most recently in May.

“Essentially the rate of issuance drops in half, year-over-year, until it eventually reaches 21 million coins. When halving occurs half as many Bitcoin are created,” said Held.

The relatively fixed supply curve for Bitcoin and low market penetration gives Held confidence about the currency’s future.

“We are at the precipice of a new bull market,” he said.

In terms of timing it is a good time to get in, even at current Bitcoin prices of around $US9,100 ($13,000) each.

Investors put off by this sum can buy smaller Bitcoin units called ‘Satoshis’ — after the fabled founder of the currency unit — that represent 100 millionth of a Bitcoin.

Gold Vs Bitcoin

Gold (goldfish) and bitcoin (white) prices over the past 10 years.

Held calls Bitcoin “digital gold” and said it is starting to compete with the “old gold”.

At the heart of the investment case for Bitcoin, as with gold, is the issue of trust.

Trust in government and currency issuers to do the right thing; that is, not devalue a nation’s fiat currency by printing or creating too much of it.

In today’s world, governments and central banks are under enormous pressure to keep the financial system going by providing it with fresh injections of currency.

But issuing too much currency can lead to inflation in an economy whereby more currency is required to purchase the same amount of goods or services.

Unlike traditional currencies such as the Australian dollar or Euro, there is a limit to how many Bitcoin can be issued.

The number of Bitcoins in circulation is currently 18.4 million, and there is a ceiling on the total number that can be created at 21 million, said Held.

“The monetary policy of Bitcoin is completely transparent. Anyone, anywhere can check to see how many Bitcoins have been created,” he said.

In this way, Bitcoin is similar to gold of which there is a finite amount in the world.

The digital currency is therefore likened to gold as an effective store of value over time.

Also, like gold, Bitcoin was set up with the features of security and anonymity in mind.

Bitcoin is in some ways different to gold in terms of its physicality.

“With gold you have all these problems with physicality – it’s not easily transportable, verifiable, or divisible – and Bitcoin solves these problems that gold has,” said Held.

The crypto currency market is dwarfed by the global gold market, which is worth $US11.48 trillion ($16.4 trillion) at current spot prices multiplied by the world’s known stock of gold.

The World Gold Council’s (WGC) count for total above-ground stocks is 197,576 metric tonnes, (32,150.7 troy oz to a tonne), and multiplied by the current gold price of $US1,808oz ($2,585/oz).

Data for personal physical gold possession is generally difficult to find. However, in India around 22,000 tonnes is held by private individuals, according to the World Gold Council (WGC).

The WGC said on its website that 47 per cent of the world’s gold or 92,947t is in the form of jewellery, 21.6 per cent is held by private investors, 17.2 per cent is in central bank vaults, and 14.2 per cent is in other hands.

Bitcoin alternatives

Bitcoin is not the only crypto currency, but it has the market’s largest share, and its value is bigger than all the other digital currencies combined.

Second placed is Ethereum (ETH), a more programmable form of digital money with different characteristics to Bitcoin, that has been around since 2015.

Tether is third placed in the digital currency market. Its value is pegged to a fiat currency such as the US$.

Traders use Tether to move currency around the world, for example to profit from price differences at various exchanges.

Each digital currency therefore performs a different market role, and there are more too — Litecoin, Monero and Dash are some newer crypto currencies that fill out the list.

How do I trade bitcoin?

The trading set-up for crypto currencies is different to that for other financial markets.

In the crypto world, exchanges can be brokers too. For example, brokers have a direct seat at trading exchanges.

In almost all other financial markets the two roles of broker and exchange are separate.

San Francisco-based Kraken is one of the oldest crypto currency exchanges and provides access to trading information, as well as allowing buyers and sellers to carry out transactions, and recently launched trading in Australian dollars.

“We are the third most liquid exchange in the world. Europe is our biggest market and the US is second,” Held said.

Exchange Traded Funds, which are financial instruments that mirror an underlying asset, are not yet available for Bitcoin.

“ETFs are the holy grail for mainstream access to Bitcoin because people can [then] invest through retirement accounts,” he said.

Regulators are generally taking a positive view towards crypto currencies and have encouraged their development and innovation, said Held.

Wallets and keys

Cryptocurrencies have their own terminology that features wallets, keys, and blockchain.

Once these relatively simple terms are understood, it is plain sailing. Investors can choose to store their Bitcoin securely online at an exchange, or take personal delivery in a digital wallet.

“There are online and offline digital wallets,” Held said.

An offline wallet is a small electronic hardware device is separated from the internet to prevent potential hacking.

Or, investors can memorise a 12-word string, hop on a plane, and on arrival in a different country type the string into a wallet to download their Bitcoin.

Bitcoin’s underlying technology such as its key cryptography, distributed systems, and how Bitcoin mining works has been around for some time.

It took Bitcoin’s visionary, the legendary Satoshi Nakamoto, to pull all of the elements of this technology together.

“It was a slow-moving, 40 year evolution toward Bitcoin,” Held said.

“Satoshi took all the pieces and put them together.”