There is no reliable basis for valuing cryptocurrencies
Thursday 14 Jan 2021 Author: Martin Gamble

Bitcoin could turn out to be the ‘mother of all bubbles’ according to Bank of America’s Michael Hartnett who has compared the price action of the cryptocurrency to former bubbles in history including the 1979-to-1981 Gold bubble which took the price up 400% in around two years.

As the charts illustrate bitcoin’s gains have been spectacular and over the month to 8 January it had gained 10-fold (it has since lost 25% of its value).

This sort of volatility isn’t normally associated with ‘safe’ assets, but more institutions are taking the cryptocurrency seriously and adding exposure as an alternative to gold as a hedge against inflation.

This feels like a rehash of arguments made over the last 40 years for various assets.

With so much debt being issued since the start of the pandemic, some investors worry about future inflation and see bitcoin as an alternative to gold.

One such institution is asset manager Ruffer which recently purchased bitcoin saying: ‘Bitcoin diversifies the company’s (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see.’

Hedging a diversified portfolio with bitcoin after conducting thorough research may be appropriate for institutions, but the worry is that recent price momentum has been driven by individual investors looking to make a quick return with little regard for the risks.

As the Financial Conduct Authority (FCA) warned on 11 January, cryptocurrencies offering high returns generally involves taking high risks and investors should ‘be prepared to lose all their money.’

Since 10 January all UK crypto-asset firms must be registered with the FCA under regulations to tackle money laundering and operating without a registration is a criminal offence.

In the long run digital currencies like bitcoin may have a role to play with central banks looking very carefully at them and large companies like Starbucks trialling them as a form of payment.

However high-profile fraud cases like the Mt. Gox exchange in Japan, where bitcoin wallets were emptied, and the assets disappeared, and high price volatility means bitcoin’s entry into the mainstream may be delayed. [MG]

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