Bitcoin could become a major part of the world’s financial infrastructure, according to some Baillie Gifford fund managers who have backed investments in the space. 
Kirsty Gibson, co-manager of the Baillie Gifford US Growth trust, said part of the team’s investment philosophy involves taking small positions where the investment case is more “tentative”, but also where the “possibility of asymmetric returns looks vast”.
One example of this is Bitcoin – where the investment trust has backed Blockstream, a Canadian blockchain technology company focused on building infrastructure for the cryptocurrency.
Although the unlisted holding only forms a 0.3% position within Baillie Gifford US Growth, Gibson said the company is solving a problem that could have profound implications.
Performance of Baillie Gifford US Growth vs sector since launch
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Baillie Gifford has been pitched various cryptocurrency investments that have all been declined for a variety of different reasons, but what drew the managers to Blockstream was the fact that it is helping Bitcoin to “realise its potential as financial infrastructure”, Gibson said.
When an individual wants to pay someone through an electronic bank transfer, that individual’s bank is debited and the recipient’s bank is credited. This done broadly by updating ledgers – records of accounts that are monitored and controlled by regulated banks and financial services institutions.
Ultimately no actual money changes places, it's just an update to the banks’ ledgers. This happens millions of times per day across different asset classes and financial institutions.
Gibson explained that blockchain – the means by which Bitcoin transactions are reconciled – is essentially “just a decentralised ledger, so it's not owned by any one individual”. This cryptocurrency ledger is updated through ‘miners’ which verify transactions and then update them on the blockchain.
The problem with Bitcoin’s blockchain technology is that although it is impossible to cheat the ledger due to the proof-of-work element that is required by Bitcoin miners, it is rather slow relative to centralised forms of transaction processing.
Gibson said: “Because the ledger is slow to update, it means that it has been not readily usable for the kind of financial functions and by the kind of financial institutions who may potentially be interested in it. This is the problem that Blockstream is looking to solve.”
The way it is attempting to address this problem is through its Lightning Network – a payment protocol layered on top of the Bitcoin blockchain intended to enable fast transactions between participants.
“Ultimately what Blockstream is looking to do is bring genuine utility into Bitcoin in a way that up to now has been really difficult for others to do,” Gibson said. “Blockstream’s increasing network of institutional partners and their highly respected founder Adam Back had given us the conviction to take a small holding.”
The initial investment was made in August of 2021 when Baillie Gifford-led $210m Series B private funding round for the company.
At the time of its investment, Baillie Gifford investment manager Allen Farrington said he was “convinced” of the potential of tokenised securities to be “transformative for the architecture of capital markets”.
“Bitcoin-based development and Blockstream’s asset issuance and management platforms can contribute to meaningfully decentralising financial infrastructure, democratising control over investment products, and firmly embedding openness and programmability in capital markets,” he said.
But another thing that appealed to Baillie Gifford was Blockstream’s position in the cryptocurrency space as an infrastructure player, rather than a Bitcoin miner such as Marathon Digital or a consumer facing wallet provider such as Coinbase.
Gibson said: “We lean more towards the infrastructure players because we are not precisely sure exactly how this industry is going to play out, but these are being backed by some very, very intelligent individuals in this space.
“The big part of the opportunity to Blockstream is actually saying: ‘Can you bring more into the cryptocurrency space by providing them with tools that enable them to do things that they historically have done in a more traditional way?’
“Blockstream is establishing infrastructure in a very fast evolving market and can make alternations to the infrastructure to the changes that are happening.”
Bitcoin miners or cryptocurrency wallet providers, however, are potentially “more exposed” to being left behind when changes occur, Gibson explained.
Bitcoin has been subject to criticism for a wide range of reasons, but Gibson suggested there could be some merit for the case of decentralisation and blockchain technology.
“I think the argument for what decentralisation brings all comes back to this idea of inflation: where you don't have some central bank manipulating the money supply or changing the money supply and just printing money,” she said.
“There's a set amount, and in time that should bring stability to the price of these cryptocurrencies, because you don't have these other players making decisions about how much money should be allocated.”