Bitcoin is a 'speculative bubble' and unlikely to become a real currency, UBS says

Cryptocurrencies like bitcoin are in a "speculative bubble" and are unlikely to become mainstream currencies, according to UBS.

There are over 1,000 cryptocurrencies, bitcoin being the biggest by market capitalization, and many have seen huge rises in value over the past few years. Bitcoin for example is up over 470 percent year-to-date.

"We think the sharp rise in cryptocurrency valuations in recent months is a speculative
bubble," UBS wrote in a white paper published last week.

The investment bank said that it is "highly doubtful" that these will ever become mainstream currencies.

"The need for companies and individuals to pay tax receipts in government-issued currency, and the potentially unlimited crypto-money supply, pose significant barriers to widespread adoption," the note said.

"The possibility of limitless supply of different cryptocurrencies creates the risk of further collapses in value. If a new cryptocurrency were created which is easier to 'mine,' and which allows more transactions to take place more quickly, demand for that cryptocurrency might naturally increase," UBS analysts said.

"Existing cryptocurrencies would likely see demand fall; a cryptocurrency that has been superseded by a new cryptocurrency with superior technology has little value. As the supply of existing cryptocurrencies cannot fall to match the decline in demand, the result would be a collapse in the value of existing cryptocurrencies."

UBS described what makes a "bubble" in any asset and concluded that cryptocurrencies, with their massive price rises, meet the definition.

"The relatively high volume of cryptocurrency turnover, against limited real-world use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction," the investment bank said.

"With each of the other characteristics of typical bubbles in evidence, a twenty-fold increase in bitcoin prices in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble."

UBS is not the only organization in the banking world to pour cold water over cryptocurrencies. JPMorgan Chase's CEO Jamie Dimon has previously called bitcoin a "fraud" that "won't end well."

Source: Bloomberg Pro Terminal

Jr Trader Alexander Kumanov

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