Cryptocurrencies are generally not supported by economic fundamentals
It may be just as well that plans for bitcoin ETFs have generally died on the vine, specifically as they failed to get past sceptical regulators’ desks. While the cryptocurrency managed to rise by almost 1,200% in 2017 to reach nearly US$20,000, it has given up around half of that value in 2018 and, according to one expert, it could hit rock bottom.
“I see a decent probability that its price goes to zero,” said Joe Davis, Vanguard’s global chief economist and global head of Vanguard Investment Strategy Group, in a recent think piece.
Davis argued that cryptocurrencies with volatile prices cannot function as a store of value, which means they do not meet the traditional criteria set out for a typical currency. And while central banks have good reason to adopt the use of blockchain-based digital currencies over the next few decades, they are more likely to use legal tender than the newer cryptocurrencies.
He also took aim at the investment case for cryptocurrencies by noting that currencies typically derive their prices from the underlying economic activity of the countries that issue them.
“Cryptocurrency prices, on the other hand … have depended more on speculation about their eventual adoption and use,” he said. “The speculation creates volatility that, ironically, undermines their value as a currency.”
And while some might think of cryptocurrencies as a way to capitalize on blockchain technology, Davis pointed out that they are not necessarily tied to the value of blockchain applications that can improve costs, speed, and security in the execution of contracts or transactions.
“Bitcoin is an investment in blockchain in the same way that Pets.com was an investment in the internet,” he said. “For investors, adding some exposure to bitcoin would mean reducing their allocations to tried and true asset classes such as stocks, bonds, and cash—the building blocks for well-diversified portfolios that can help them meet their goals.”
