ING: Bitcoin will be a niche asset for 'tech nerds,' the privacy-obsessed, and criminals

ING: "Bitcoin has little to offer to a wider audience, and will likely return to being a niche product for a select group of enthusiasts."
Economist argues that issues around regulation, volatility, transaction speed and cost, and a lack of intermediaries will hold bitcoin back in the long run.
"We join the crowd of analysts observing typical bubble characteristics."

LONDON — "Bitcoin is destined to become a niche asset," according to Dutch banking giant ING.

Economist Teunis Brosens argues in a note circulated on Monday that bitcoin has drifted too far from its original goal of being a decentralized payment system and its recent price rise is unsustainable.

"Bitcoin has little to offer to a wider audience, and will likely return to being a niche product for a select group of enthusiasts," Brosens wrote.

"One day, beyond the hype, Bitcoin will return to being the niche product that it was in its initial years. Users will include tech nerds, people obsessed about their privacy, people afraid for (hyper)inflation in traditional currencies, and people wanting to circumvent central banks for ideological or criminal reasons."

In the note, titled "A cryptocurrency reality check," ING argues that bitcoin will fail to break into the mainstream because of various shortcomings with the technology and the bitcoin network.

Brosens argues that a lack of regulatory supervision, a lack of intermediaries looking after customers' bitcoins, slow transaction speeds and high transaction costs on the network, and high volatility will all put off bitcoin users in the long run.

"Currently, Bitcoin is able to process about 7 transactions per second," Brosens writes. "For Bitcoin to play a meaningful role as a payment system, the transaction processing power needs to be a 100, maybe even a 1000 times better."

As for volatility, Brosens wrote: "A world in which your money buys you a large latte today, but only a small
espresso tomorrow, is hardly convenient."

Bitcoin is prone to wild price swings, with moves of 10% or even 20% on a day not uncommon. The price has almost doubled over the last month, for example.

Despite the shortcomings Brosens identifies, bitcoin has rallied over 1,500% against the dollar this year. How does he explain the rise?

"Bitcoin’s high-value today is based on shaky foundations," he wrote. "The only justification for investing in bitcoin today is the assumption that others are willing to buy bitcoin at higher prices in the future."

Speculation has driven bitcoin's big price gains, he argues. The phenomenon has been exacerbated by bitcoin enthusiasts urging people to HODL (a bastardization of "hold" that has become a common motto in the cryptocurrency world.

Brosens writes: "You will find people (often invested in bitcoin themselves) arguing that buy-and-hold is the Bitcoin strategy to use. Oh and please don’t sell but do hold, because otherwise, you’re spoiling it for everyone else. If that indeed is today’s dominant Bitcoin application, then it has drifted far from the goal [bitcoin founder Satoshi] Nakamoto had in mind in 2008."

Brosens said that many bitcoin investors in 2017 probably "don’t really understand the basics and original goals and ideals of cryptocurrencies, and don’t care much either."

As for whether bitcoin is overvalued, Brosens wrote: "A niche asset adopted worldwide could still have a substantial user base and hence value. It is therefore impossible to say whether the current bitcoin market price is “too high” for a niche asset.

"Then again, we join the crowd of analysts observing typical bubble characteristics: the idea of an asset that is new, revolutionary, almost magic – hard to understand, but let’s invest anyway because it will become huge. This idea is a form of “this time is different”-thinking. “Yes we know about all those previous bubbles that popped, but Bitcoin is really, really different.” We are not so sure."

Brosens is careful to distinguish this bitcoin disdain from his thoughts on blockchain technology, which underpins bitcoin.

"The blockchain is a great technology and may bring progress to a variety of fields, ranging from finance to health care, and from notary to voting," Brosens said. "Long live the blockchain."

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