Crypto going mainstream? Not so fast.

CIO Daily Updates

by Chief Investment Office 09 Feb 2021

Thought of the day

The price of Bitcoin has surged 25% in two trading sessions, rising from around USD 37,900 at the end of Friday to a record high above USD 48,000 on Tuesday. The primary driver was news from Tesla CEO Elon Musk that the automaker had exchanged USD 1.5bn of its reserves into the crypto, and that it expects to accept Bitcoin as a payment mechanism “in the near future.” Separately, a widely shared sell-side report speculating Apple could be the next to adopt bitcoin in its Wallet app added to momentum.

But we advise investors against viewing this as a “mainstream moment” for crypto, and counsel caution before engaging in speculation.

  • Crypto is not a currency. The basic function of a modern currency is to store value; by contrast, the diminishing incremental supply of bitcoin has made “bubbling” one of its basic functions. If a corporate were to increase its euro holdings or that of any other major currency, we wouldn’t see a move of this magnitude. That a single individual can have such an impact on crypto prices underlines concerns about low liquidity and high volatility. Far from boosting the credibility of crypto, we think this undercuts it.
  • “Mainstream” looks like hype. Although Tesla might start using Bitcoin as a payment mechanism, this is different from actually pricing products in Bitcoin or retaining the Bitcoin received, actions that would be more consistent with mainstreaming it as a currency. We also note unresolved regulatory risks, with the US Treasury’s Janet Yellen last month calling for efforts to “curtail” cryptos, calls which may grow louder now that S&P 500 investors have involuntarily gained exposure to crypto volatility. We are also skeptical that mega-cap platforms with in-house payment ecosystems and strong global networks would cede their infrastructure to volatile, and regulatorily risky, crypto networks.
  • A sustainability setback. Our own research suggests a growing investor focus on environmentally-aligned investment strategies. Crypto mining and management can contribute to carbon emissions without improving living standards, since individuals or teams use computing power and specialized software to produce Bitcoin and Ethereum. Bitcoin uses as much energy as the whole of Switzerland, according to an online tool from the University of Cambridge. Meanwhile, a separate study from August suggests that Bitcoin’s electricity consumption is underestimated and finds the network “represents close to half of the current global data center electricity use”. Its documented use in money laundering and tax evasion offer more red flags for ESG investors. We are not convinced the growing cohort of sustainability-oriented investors can reconcile these problems.

We advise clients to practice caution with crypto speculation. The recent bursting of bubbles among select US small caps underscores the risks in speculation and momentum chasing. Investors looking for exposure to digital payment assets can consider fintech—an emerging sector we think might yield “The Next Big Thing” for investors.

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