Bitcoin: emerging asset or speculative mania?

The launch of Bitcoin futures on some major US exchanges has been an important step in the development of the cryptocurrency, giving it greater familiarity and wider usage.

Still, while 2017 has seen it evolve from being largely associated with black-market and criminal use, towards greater legitimacy, our team's view is that Bitcoin remains a speculative, immature financial instrument based on an experimental technology.

The broad idea behind cryptocurrencies is that they can provide an efficient alternative to traditional ‘fiat’ currencies, appealing to those who distrust central banks and those who wish to conduct transactions, peer-to-peer, away from the oversight of banks and regulators. Whereas fiat currencies have their foundations in the traditional system of central banks and financial intermediaries, cryptocurrencies are based on networks of cryptography, miners, exchanges, and wallets. In theory, cryptocurrencies could provide low cost, secure, decentralised alternatives to fiat money. In practice, they are nowhere near being ready to stake such claims.

Additionally, cryptocurrencies are currently plagued by a number of practical problems that would have to be overcome before they could be seriously considered as plausible alternatives to fiat currencies, including hacking and theft, cryptocurrencies being lost forever due to bugs and accidents, the market infrastructure beginning to look strained, and decentralisation.

Further, the processes supporting cryptocurrencies are hugely energy consuming, with vast numbers of computers operating 24 hours a day, running the calculations that generate each unit of the digital currency.
Another important consideration for Bitcoin investors is the growing regulatory risk and whether the shortcomings of cryptocurrencies exposed by their rapid development are just teething problems, or rather inherent flaws in their design.

Only time will tell if current investors will ultimately be rewarded for disregarding the developing problems of cryptocurrencies. Perhaps some are chasing a dream that will never materialise. Whatever happens, both anecdotal evidence and the price action suggest that there is a considerable degree of speculation already embedded in cryptocurrencies.

The recent move in Bitcoin is looking to us increasingly like a speculative mania, rather than being evidence of an emerging mainstream asset class. The market is still very much dominated by retail investors and press reports highlight some extravagant use of leverage. While it is very difficult to form a meaningful view of the medium-term potential of any individual cryptocurrency, the combination of parabolic price moves, high retail participation, and leverage mean that when the next Bitcoin dip arrives, it has the potential to become a hair-raising affair. It is therefore our opinion that Bitcoin is still a long way from being an investable asset with a serious role to play in institutional portfolios.

Source: Janus Henderson Investors

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