Speculative excesses at Bitcoin & Co.

The Bitcoin share price has risen by around 45 per cent since 2012. Another 1,000 other crypto currencies have been created. Everything suggests a bubble is forming.

Blockchain has the potential to make business processes and payments safer, faster and cheaper. But it is completely uncertain whether such “crypto currencies” will survive in the long term and if so which.

Investors should stay well away from Bitcoin & Co. Their share price performance looks more like an auction than a fair pricing process. Regulation by the supervisory authorities is probably only a question of time.

 

 

What is a speculative bubble? – Many capital market researchers and Nobel prize-winners have worked on this question without having developed a viable early warning system. But we believe there are some empirical features that have characterised previous speculative bubbles. These include the fact that valuation is not possible using traditional methods: “this time everything is different,” investors are euphoric and all outsiders mourn the share price gains they have missed. From the investor’s point of view all these features apply to the crypto currencies – above all Bitcoin.

As is normal for all currencies, the inherent value of the crypto currencies cannot be measured in farthings and pennies. Currencies do not produce any interest, dividends or other revenues. So the methods of financial mathematics and logic cannot identify a discounted earnings value. The inherent value of currencies has always been based on the trust that one has in the currency and the central bank behind it. Per se, there is nothing to argue against central banks not having a monopoly on currencies as a means of exchange. The idea of a democratic, decentralized currency without a concentration of power at the central banks convinces not only idealists. But why should an investor bet at random on any old cyber currency when it is unclear whether it will survive or not? What happens to crypto currencies if companies like Amazon or Google introduce their own payment mechanisms? Who should one trust more, Bitcoin or Amazon coins? Investors could expect to lose everything if they bet on the wrong currency.

What’s more, the market for Bitcoins and other cyber currencies already seems to have fallen into a state of anarchy some time ago. Fraudulent machinations and conflicts of interest cannot be ruled out.

Investors should, therefore, stay well clear of these products. States and regulatory authorities should protect (private) investors against their own greed by corrective intervention in the cyber currency markets. The time will probably already be ripe for such action at the latest after the first fraud or the use of crypto currencies to get around the law.

 

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