UBS: Cryptocurrencies are in a 'speculative bubble'

USB calls recent cryptocurrency price rally a "speculative bubble" in a note to clients.
But investment bank says underlying technology, blockchain, is "akin to investing in
the internet in the mid-nineties."

LONDON — UBS thinks cryptocurrencies are in a "speculative bubble."

Cryptocurrencies have boomed in popularity in 2017, with over 1,100 now in circulation. The combined value of all digital currencies has passed $175 billion, according to CoinMarketCap.com, led higher by bitcoin, which surged late last week to repeatedly set new record highs.

UBS warned clients last week that it doesn't think the recent rally is supported by fundamentals. "We think the sharp rise in crypto-currency valuations in recent months is a speculative bubble," the bank wrote.

A note sent from UBS's chief investment office compared the current rush to invest in cryptocurrencies to the Dutch Tulip bulb bubble of the 17th century, the South Sea bubble, and the dot-com bubble.

"A constant theme of bubbles is the ability of speculators to shout that dreaded cry "this time it's different," analyst Sundeep Gantori, UBS Wealth Management's Global Chief Economist Paul Donovan, and their teams wrote.

"Logical arguments against the bubble can then be disregarded as speculators declare that the doubters simply do not understand that the world has changed. The problem with this theory is that the world never changes that much."

Like past bubbles, cryptocurrencies phenomenal rally is underpinned by the promise of future gains, UBS wrote. Once blockchain technology is adopted or the projects funded through issuing cryptocurrencies come to fruition, early investors hope to profit. In other words, people are speculating on the future.

The UBS analysts write:

"The real world benefits are said to take years to materialise, even among evangelists. And the relatively high volume of cryptocurrency turnover, against limited real-world use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction.

"The remaining characteristic – fundamental value – is the most difficult to assess, since unlike in government-backed currencies, no crypto-currency has an economy behind it. But with each of the other characteristics of typical bubbles in evidence, a twenty-fold increase in bitcoin prices in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble."

UBS joins JPMorgan CEO Jamie Dimon as a vocal skeptic of the cryptocurrency sector. Other investment banks, like Goldman Sachs and Morgan Stanley, have been more bullish on the emerging sector.

While UBS is skeptical, the investment bank does believe in the potential of the technology that underpins cryptocurrencies: blockchain. UBS says: "Investing in the blockchain wave is akin to investing in the internet in the mid-nineties."

UBS advises putting money into blockchain "technology enablers – in software, semiconductors, and platforms; and early & successful adopters – in finance, manufacturing, healthcare, utilities, and the sharing economy."

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