Lionel Laurent, a writer for Bloomberg, claims bitcoin and other surging cryptos are bubbles that will eventually burst. He cites a recent warning by Aberdeen Asset Management’s Peter Denious that speculation is feeding the frenzy, and he believes too many people are investing in cryptos as a way to escape worries about the condition of publicly regulated markets.
Denious claims a lot of money will be lost before a lot will be made, calling it a “gold rush” mentality.
Bitcoin nearly tripled its value year to date while Ether has jumped more than 40-fold. Laurent observes the reason for this isn’t because people are using cryptocurrency to buy things, or because government regulators are taking a liking to them. It’s simply seen as a way to profit.
Regulated Markets Impact Cryto
Laurent said the “crypto craze” is hard to separate from concerns in regulated public markets following 10 years of “cheap central bank cash.” Bubbles permeate all aspects of current financial markets.
Bank of America cited the following Friday, Laurent observed:
- Argentina has an oversubscribed 100-year bond.
- Facebook’s market cap surpasses the MSCI India index.
- The U.S. Treasury market’s volatility has reached an all-time low.
The fact that the BoA report doesn’t mention bitcoin makes it harder to put cryptocurrencies in the right perspective. Nor the fact that John McAfee, CEO of MGT Capital Investments, and Fidelity Investments CEO Abigail Johnson are mining bitcoins.
Cryptocurrency markets reflect a desire to escape bubbles in public markets as opposed to simply emulating them, according to Laurent.
Cryptos also capitalize on the perception that they are markets in opposition to government and central bank policy.
Crypto Offers An Escape
While low yields drive wealthy investors to bigger risks such as Argentine debt, some view cryptocurrencies are seen as an escape from instability and financial repression.
In Venezuela, the demand for cryptocurrency has soared in the face of currency devaluation, political instability and ripple digit inflation, giving it among the greatest potential for bitcoin adoption, according to the London School of Economics.
Should a bubble burst, investors will need to lower their expectations about what cryptocurrency can achieve without rampant speculation.
The more troublesome scenario is that political instability about wealth inequality and central bankers will drive more people to cryptocurrencies. Albert Edwards of Societe Generale has observed that people are close to turning against unaccountable and unelected central bankers following years of economic stagnation and crisis.
Bitcoin’s computer scientists, Laurent concludes, do not merit being viewed as a better alternative to publicly regulated markets.
Should the path out of the financial crisis get worse, it may be too late to stop the rush into cryptocurrencies. Bubbles in both the crypto and publicly regulated markets appear to be too closely connected for investors to be comfortable.
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