Why bitcoin's rise is a speculative bubble

Thought of the day

Bitcoin futures prices rose by as much as 22% in the first hours of trading on the Chicago Board Options Exchange (CBOE) Global Markets’ new futures contract, which launched on 10 December. While trading systems operated normally, the CBOE’s website homepage crashed due to heavy traffic.

Interest in bitcoin remains intense, inspired in part by a fear of missing out after price gains of more than 1600% this year, but we remain skeptical:

  • Cryptocurrencies have the hallmarks of a speculative bubble. They are relatively new and lack fundamental economic backing. High turnover, against limited real-world use, suggests that many buyers are seeking speculative gain.
  • Short sales are now possible. During its first session, the CBOE contract triggered two circuit breakers, which temporarily halt trading after prices change by a pre-set amount. Futures contracts may reduce some volatility, but also allow bets against the cryptocurrency. Until now, investors could only buy and hold bitcoin.
  • Bitcoin supply is limited, but cryptocurrency supply is not, with thousands of potential substitutes. Bitcoin’s value as a transactional tool, a hallmark of a currency, is also suspect. The popular Steam game distribution platform last week dropped bitcoin as a payment option because of high transaction fees and wild volatility.

In our view, the rise in cryptocurrencies is a speculative bubble, although it’s difficult to predict when it will peak. Instead, we advise investing in the underlying blockchain technology, which we expect to generate USD 300–400bn of global economic value by 2027.

For more, see our report:

Do you like this?

Please click below to sign up for more investment views.