UBS: Bitcoin ‘too unstable and limited’ to be money or a new asset class

A bitcoin ATM.
AP Photo/Kin
Cheung

• UBS: Bitcoin is “currently too unstable and limited to
  become a viable means of payment for global transactions or a
  mainstream asset class.”
• As much as 70% of bitcoin’s price action appears to be
  driven by speculation, according to UBS.
• The bank doesn’t rule out bitcoin becoming a viable
  payment system in future though, saying it may follow a similar
  adoption path to PayPal.

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LONDON — 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.”

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