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“Demystifying Bitcoin”– Luca Paolini, Pictet Asset Management looks at what could potentially go wrong

“It’s no coincidence that Bitcoin is back in the headlines just as concerns about inflation start to rumble. That’s because cryptocurrencies, among which Bitcoin has the highest profile, have become barometers of sentiment about aggressive central bank monetary policy and financial repression. But there’s a lot that can potentially go wrong for Bitcoin. So much so, that it would be hard to justify the digital currency as anything other than among the most speculative investments.”

Summary

“The growing fear is that monetary authorities are gradually monetising government deficits, which is to say that they’re permanently funding government overspending. That’s an issue, because historically debt monetisation has been a precursor to uncontrolled inflation.

“Just the fact that central banks are depressing government bond yields to below even today’s low rate of inflation has reduced the opportunity cost of holding assets that don’t generate income, assets like Bitcoin.

“Bitcoin has seen an increase in companies’ willingness to use it for its original purpose: as a means of exchange. Tesla has said it would sell cars priced in Bitcoin and has converted some of its cash dollar holdings into the cryptocurrency. And Mastercard and BNY are also looking to transact in Bitcoin or hold it on clients’ behalf.

“Its recent price moves have raised doubts over Bitcoin’s potential as an alternative to safe assets or as a store of value”.

“One key problem for investors is that Bitcoin is impossible to value. It’s not a claim on any underlying asset – it is the asset”.

“The more Bitcoin attracts speculative interest from amateur investors, the more regulators that exist to protect them will take note. At its recent peak, the total value of all Bitcoins in existence was estimated to have reached USD1 trillion. Although not yet seen as a potential systemic risk for the financial system, that’s a big enough market to draw regulatory scrutiny.”

“The cryptocurrency routinely captures headlines and has substantial and vocal support on internet chatrooms. But the risks are heavily stacked against it ever becoming a serious and substantial investment vehicle, much less a replacement for the dollar.”

 

For further analysis and commentary, please see attached.

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