Bankers split on the outlook for Bitcoin

Bitcoin
Bitcoin price has surged above $7,000 for the first time

The value of Bitcoin has surged past $7,000, continuing its trend over the past year of consistently reaching all-time highs. Year-to-date it has risen almost 600%.

This most recent ascent in prices was seen after CME announced plans for Bitcoin futures contracts, pending regulatory approval, by the end of the year.

There is also a scheduled split in how Bitcoin is produced, called a ‘hard fork’, which will lead to supply being doubled as the new types of Bitcoin is produced. There have already been two forks this year, the first leading to rally in prices when Bitcoin Cash was introduced, the second, when Bitcoin Gold was produced, led to an immediate slump in prices.

CME Futures

But what will CME’s decision to push Bitcoin futures mean for the cryptocurrency? And what do market analysts think of how Bitcoin will perform in the future?

CME’s decision leads to a likely scenario that soon investors will be able to trade Bitcoin exchange-traded funds (ETF). A Bitcoin ETF, if approved, will allow the digital currency to gain more credibility, but this news is worrisome for some.

Swiss bank UBS has warned previously of the Bitcoin bubble and Paul Donovan, their Global Chief Economist, has drawn comparisons to previous bubbles. Donovan referred to the 1937 tulip market bubble in the Netherlands, when a year previous cash-settled futures were introduced, which led to the price of the flower skyrocketing, only for the bubble to burst. Furthermore, in a white paper published by UBS, the bank stated that cryptocurrencies are merely in a “speculative bubble”.

The paper points to the fact that the high volume of trading in cryptocurrency is in stark contrast to its current real world uses suggests that many investors are simply seeking speculative gain. This is coupled with “an absence of any fundamental economic backing,” which is referring to the fact that government taxes are the largest single income for the majority of economies, and if governments do not accept cryptocurrencies as payment from companies, which they assert is most likely, then many firms will not accept digital payments as it would pose a significant exchange rate risk, especially considering the volatility of Bitcoin prices at present.

A proponent of cryptocurrencies, Wall Street strategist Tom Lee, that predicts the value of Bitcoin to be $12,000-$55,000 in the next five years, would have issue with assumptions made in the UBS white paper.

Lee asserts that some central banks are already exploring the idea of accepting cryptocurrencies, examples being Vietnam and Denmark, and that Bitcoin volatility may not last, pointing to gold prices being 15% more volatile in the 1970’s as the US abandoned the gold standard. The exchange rate risk that would hinder many companies accepting the currency would fall if volatility did subside.

In contrast, Credit Suisse Chief Executive Tidjane Thiam, seemingly backed the conclusions made in the UBS white paper. He again pointed to the only reason Bitcoin currently has any demand is in order for investors to make “which is the very definition of speculation and the very definition of a bubble.”

Ronnie Moas, founder of Standpoint Research and former Wall Street strategist, is another who predicts Bitcoin prices soaring, forecasting a jump to $50,000 in the next decade. He suggests that the only detractors of Bitcoin are banks who have a direct interest in discrediting the currency.

His reasoning for his, what some would perceive as outlandish, forecast is simply driven by supply and demand. Bitcoin’s supply is capped at 21 million, it will never reach higher than this point, expected to be reached by 2140, whereas Moas argues demand is likely to outstrip this. He suggests that in time over 200 million people will be trying to buy the currency. One of the main forces behind this will be that, whilst Bitcoin may seem extremely volatile to some, for those living in countries such as Zimbabwe or Venezuela have witnessed far more turbulence.

Whilst Bitcoin, and other cryptocurrencies, can draw comparisons to previous market bubbles and its current volatility does pose issues, if it manages to add legitimacy like that from the CME’s decision there could be a great demand for it which will push it to a currency that is here to stay.