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Updated January 18, Bitcoin will not replace national currencies and cryptocurrency prices are in one of the biggest bubbles in history, which is set to burst, warn analysts from Capital Economics.
In a page research note, London-based economists Vicky Redwood and Kerrie Walsh outline in detail their reasons for believing that bitcoin does not have a bright long-term future, even if the blockchain technology behind it does. Ms Redwood, in particular, should know a thing or two about currencies, having worked at the Bank of England after studying at Oxford and the University of Warwick.
The note was released after the bitcoin price plunged by around a quarter in about a day , with other major cryptocurrencies such as Ethereum and Ripple falling by even more. One of the biggest problems with cryptocurrencies is that they do not have what analysts call an "intrinsic value" — unlike shares, they do not pay dividends; unlike housing, there is no potential rent; unlike gold, they are not physically useful or even pretty.
Cryptocurrency devotees counter this by arguing that so-called "fiat currencies" — money issued or backed by central banks — are also intrinsically worthless. But unlike dollars, for example, bitcoin is not backed by a credible authority, such as a central bank or government," the report countered.
Some argue that bitcoin's value will be in supplanting gold as the world's preferred safe haven store of wealth. However, that would assume that bitcoin was the sole accepted cryptocurrency, whereas its dominance is currently being challenged by more than a thousand rivals.
The economists also warn that few current bitcoin investors appear to have done such calculations and risk analysis before speculating.
But, take a moment of pause for some dubious national pride, as bitcoin still has a long way to go to beat one of the world's biggest ever major bubbles, that of Australian resources firm Poseidon in Accordingly, they rose times over the space of just a few months. For instance, any company that even mentions the word 'blockchain' sees an immediate jump in its value," they noted. This happened recently when Kodak's share price surged after the struggling imaging company announced it was launching its own cryptocurrency.
This avalanche of new cryptocurrencies is a key reason why the economists believe there is a bubble in many of the existing ones. The good news is that, aside from draining the savings of a handful of millennial enthusiasts and wealthy tech speculators, Capital Economics believes the wider fallout will be limited. Bitcoin's market capitalisation is still small; it is not held by institutions; and it has little correlation with other financial markets," they noted.
As for their claim that the possibility of bitcoin replacing fiat currencies is "rubbish", the economists point to some of the reasons why governments moved away from the gold standard to floating exchange rates.
A widespread adoption of bitcoin could prompt a re-run of the problems seen under the gold standard. But the analysts do see a potential role for central bank digital currencies CBDCs , despite Australia's Reserve Bank governor talking down the idea recently.
Allowing businesses and households to bypass banks for simple transactions could also boost economic growth. Outside the financial sector, the underlying blockchain technology behind bitcoin also has a wide range in uses, from facilitating transactions and trade, to maintaining government records such as tax, health and property transfers.
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