UBS Intellectual Capital Don't Get Swept Up In The Bitcoin Craze


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. But, in our view, bitcoin is still a bubble waiting to pop.

Interest in bitcoin remains intense, inspired in part by a fear of missing out after price gains of more than 1600% this year. The CBOE’s website homepage even crashed due to heavy traffic, although trading systems operated normally.

But 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.

And short sales are now possible. During its first session, the CBOE contract triggered two circuit breakers, which temporarily stopped trading after prices changed by a pre-set amount. Futures contracts may reduce some volatility, but they also allow bets against the cryptocurrency. This is a new development. Until now, investors could only buy and hold bitcoin.

Moreover, Bitcoin supply is limited, but cryptocurrency supply is not, with thousands of potential substitutes. Bitcoin’s value as a transactional tool, a hallmark of any currency, is also suspect. The popular game distribution platform Steam 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. One way around all the uncertainty may be investing in the underlying blockchain technology, which we expect to generate $300-400 billion of global economic value by 2027.