Bitcoin is neither a new type of money or nor a new asset class, according to UBS. Joni Teves, a global macro strategist at the Swiss bank, said in a note to clients this week that the world’s biggest digital currency is “currently too unstable and limited to become a viable means of payment for global transactions or a mainstream asset class.”
“Owing to its lack of price stability, bitcoin falls short of criteria that need to be satisfied to be considered money,” Teves said. Bitcoin surged over 1,000% against the dollar in 2017 to reach a peak of around $20,000 in December. It has since crashed to around $7,370 as of Friday. Teves said bitcoin also has a problem with speculators influencing the price. UBS’ analysis suggests as much as 70% of price action driven by “speculative demand.”
Aside from price fluctuations, bitcoin also has scalability problems associated with the size of “blocks” packages of transactions that are processed and money supply. “Putting bitcoin’s limitations into context, in order to match US M1 money supply, bitcoin’s price would need to be around $212,992,” Teves wrote.
“To process Visa’s c.$30 billion of daily transactions using the old core protocol, the block size would need to be 18.8MB instead of 1MB, or the price would have to be around $187,611.” Bitcoin is not yet used as a common payment method, another negative factor when assessing its viability as a new form of currency. While bitcoin may have some diversification benefits as it is relatively uncorrelated to other assets, Teves said that “this is offset by bitcoin’s price volatility and its lack of clear regulatory support or investor safeguards.”
UBS’ verdict will come as a blow to bitcoin bulls, who have variously touted bitcoin as a digital equivalent to gold or a decentralized payment network. However, while Teves is downbeat on the current state of bitcoin, she doesn’t write off the cryptocurrency completely.
“Like new technologies that have been introduced throughout history, it is possible that it is just a matter of time before bitcoin (or some form of it) is adopted on a larger scale,” she writes. Teves compares bitcoin to Paypal, suggesting bitcoin could follow a similar growth path as a digital payment system, However, she said that bitcoin must overcome issues around regulation and scalability before this can be the case.
It is not the first time UBS has taken a pessimistic stance towards digital currencies. The Swiss bank called cryptocurrencies, in general, a “speculative bubble” in a note to clients last year. But the bank added that crypto’s underlying technology, blockchain, is “akin to investing in the internet in the mid-nineties.”