Bitcoin meets all of the essential criteria for an asset bubble, which is sure to burst soon and the spillover effects into traditional financial system would be limited, while the blockchain technology holds promise for investors, Allianz Global Investors said.
“As a currency and asset class, bitcoin has potentially fatal flaws – which is why we believe it’s a matter of when, not if, the bitcoin bubble will pop,” Stefan Hofrichter, head of global economics and strategy at Allianz Global (a unit of Allianz SE), said in a recent blog post.
“Yet the blockchain technology that powers cryptocurrencies could bring significant benefits to investors.”
The top cryptocurrency’s trajectory resembles a textbook case of a financial-market bubble that may soon pop, Hofrichter said.
Comparing Bitcoin’s five-year inflation-adjusted price momentum against that of previous asset bubbles, the economist pointed out that Bitcoin dwarfs the runners-up – the Mississippi bubble of 1720 and the Amsterdam Tulip Mania of 1637.
In fact, Bitcoin also surpasses the dot-com bubble of the 1990s and the Japanese asset price bubble of the 1980s, he added.
Among the essential criteria for any asset bubble are “new-era” thinking, over-trading, lack of regulation, scams and significant overvaluation, Hofrichter said.
Ultra-easy monetary conditions across the globe, rising leverage and the launch of innovative products related to cryptocurrencies are also features of an asset bubble, he added.
The intrinsic value of Bitcoin must be zero as it is a claim on nobody and does not generate any income stream, the economist noted. Same could be said about gold, but the yellow metal has been widely accepted as a thing of value for several thousand years, he added.
However, Hofrichter does not think the end of the Bitcoin bubble would matter much for investors in traditional financial assets.
The economist also said that Bitcoin cannot serve as a currency due to the high transaction cost, significant price volatility, and an impossible store of value.
Bitcoin also fails to satisfy the environmental, social and governance factors suitable for a currency, he added.
Meanwhile, Bitcoin’s underlying blockchain or distributed ledger technology carries potential merits such as significantly reducing transaction costs, Hofrichter said. It is this feature that mainly attracts financial institutions including his firm to explore this new technology.