The emergence of electronic gold…?
“I hope our fund will be the first hedge fund to take advantage of using Bitcoins,” explains Anatoliy Knyazev in Moscow. One of Exante’s managing partners, Knyazev confirms that the firm is currently in the process of structuring the fund, with a view to launch this autumn.
Bitcoin is a decentralised, digital currency that could revolutionise the world of payments. It refers to both the open source software used to trade the electronic currency, as well as the currency itself. An anonymous group developed the concept in 2009, publishing a white paper that detailed the crypto-currency algorithms and proof of how Bitcoin worked.
As Knyazev explains: “Bitcoin is basically an electronic version of cash, or gold. Each user has a file on the computer representing their wallet. It has a unique public key which you use to send and receive money.” In order to use received Bitcoins, the user needs to have the private key that matches the public key the Bitcoin was received with.
Bitcoins function the same way as cash: every transaction made is irreversible, and if, for whatever reason, the Bitcoin wallet is lost, there is no way of retrieving it: “What’s lost is lost, what’s transferred is transferred,” says Knyazev.
The Bitcoin system is peer-to-peer. All transactions are visible, and by using cryptographic algorithms Bitcoin is able to verify every successful transaction. What this does is build an ever-growing chain of transactions, allowing users to see where Bitcoins have been traded.
It’s still early days for Bitcoin, which remains a highbrow concept. However, one of the features that could prove critical to its success is in-built deflation. This is because the rate at which Bitcoins arrive into the system is pre-determined. That rate follows a pre-determined curve, which will drop at a future point causing the inflow of new Bitcoins to reduce.
“With Bitcoin you have a process called ‘mining’, which involves the accrual of Bitcoins. To mine at a significant rate one needs custom designed hardware with GPUs or FPGAs,” says Knyazev. This lies at the heart of Exante’s investment strategy in the Bitcoin fund: to raise assets in US dollars and euros and purchase Bitcoins, whose value should increase over time as more users mine them.
“We will hold the Bitcoins securely in a Swiss vault over a period of three, five, 10 years. The fund will be a regulated entity through which institutional investors will be able to access the Bitcoin market,” says Knyazev.
As the rate at which Bitcoins are added to the system is controlled, it means that the more people mine, the less each of them is likely to get: currently the number of bitcoins mined averages 7,200 per day but in the near future this will drop to 3,600 bitcoins per day, and will continue to decline. Therefore, the acquisition of bitcoins will become more and more competitive.
“The system will peak at 21 million Bitcoins in 2020. Right now, in terms of where we are on the curve, around one half of the Bitcoins have been mined globally. The rate of circulation is higher in the early stages and slows down with time. So even though it’s only taken three years to mine half of the Bitcoins, it will take another 10 years to mine the remaining half,” explains Knyazev.
The niche fund strategy plans to launch with around EUR1million and Knyazev is excited about its prospects:
“As soon as Exante’s clients hear about a smart new idea they tend to want to get involved. We are confident this will be the case with the Bitcoin fund.”