HXL have previously called bitcoin a speculative bubble as we compare the rise in the cryptocurrency to the Dutch tulip mania that occurred in the Netherlands in the 17th century that ultimately resulted in the crash of the market in 1637. Even with the introduction of bitcoin futures, this still does not legitimise bitcoin. Until governments accept cryptocurrencies as tax payments, bitcoins are unlikely to become a mainstream currency.
Over the past year, bitcoin has surged more than 1700% and touched a record of $17,578.45. Cryptocurrencies are seen as an alternative global currency free of regulations, oversight and appeals to people involved in the black economy instead of being used in everyday transactions.
Cryptocurrencies, especially bitcoin, are currently driven by a wave of speculation and is dangerously turning into the very definition of a bubble with a high chance of buyers losing all their money. Bitcoin?s wild ride so far in 2017 bears similarity to the Dutch tulip craze in the early 1600s that saw the price of the flower skyrocket then crash in 1637. Ultimately, cryptocurrencies are not a stable store of value given the large fluctuations bitcoin has seen recently ? even on a daily basis. Furthermore, it is not widely used as a medium of exchange and it will not replace government-issued currency. Finally, there is nothing to stop existing cryptocurrencies being replaced with a more valuable alternative, thereby driving the value down of existing coins.
Currently, bitcoin has not reached a large percentage of global investors. Therefore, when the bubble bursts, the economic consequences will not be too disruptive. However, if there continues to be rising interest in cryptocurrencies, there will be an increase risk in people losing their savings, thereby potentially creating a negative wealth effect which will have damaging consequences in the long term.
For the moment, it is hard to ignore bitcoin?s rapid advance and it has become too big an asset for many investors to ignore. The majority of the world?s central banks have warned about governance and risk issues when investing in cryptocurrencies. While the technology behind it (blockchain) can be potentially applied to payment systems, cryptocurrencies should be treated like any type of investment ? knowing the risk involved.
HXL can assist clients who are interested in investing in cryptocurrencies. We already have accounts ready for trade. We urge clients who are keen to purchase cryptocurrencies to be aware that it is not a stable store of value as prices can fluctuate up to 20% per day. We would allocate cryptocurrencies into the speculative assets section of an investment portfolio.