UBS is warning clients over Bitcoin’s bubble

8 years ago - Published in Finance, Fintech Land, Fundamental Analysis

UBS thinks cryptocurrencies are in a "speculative bubble." 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.

A note sent from UBS's chief investment office compared the current rush to invest in cryptocurrencies to the Dutch Tulip bulb bubble of the 17th century, the South Sea bubble, and the dot-com bubble.

"A constant theme of bubbles is the ability of speculators to shout that dreaded cry "this time it's different," analyst Sundeep Gantori, UBS Wealth Management's Global Chief Economist Paul Donovan, and their teams wrote.

UBS said that governments set taxes and this is the largest single income for almost any economy. Therefore, people will always want government-backed currencies to pay tax. Even though a company could accept cryptocurrency as payment, it would need to pay different taxes in government-backed currency. And so the company would be taking an exchange rate risk.

"If governments refuse to accept cryptocurrencies for tax payments, the single most important transaction in an economy, that significantly reduces demand for cryptocurrencies. Governments are highly unlikely to ever take this step," UBS said.

Like past bubbles, cryptocurrencies phenomenal rally is underpinned by the promise of future gains, UBS added. Once blockchain technology is adopted or the projects funded through issuing cryptocurrencies come to fruition, early investors hope to profit. In other words, people are speculating on the future.

UBS joins JPMorgan CEO Jamie Dimon as a vocal skeptic of the cryptocurrency sector. Other investment banks, like Goldman Sachs and Morgan Stanley, have been more bullish on the emerging sector. While the bank is skeptical, the investment bank does believe in the potential of the technology that underpins cryptocurrencies: blockchain. UBS says: "Investing in the blockchain wave is akin to investing in the internet in the mid-nineties."

UBS advises putting money into blockchain "technology enablers – in software, semiconductors, and platforms; and early & successful adopters – in finance, manufacturing, healthcare, utilities, and the sharing economy."