When it comes to cryptocurrencies like Bitcoin, I almost always defer to people who know markets, technology and money much better than I do.
I am generally optimistic about blockchain, the technology behind cryptocurrencies, as a promising way to do everything from track transactions to pay artists. Yet I’m not sure that cryptocurrencies are the right way to use this technology — yet.
Keep in mind that many mainstream economists and bankers are sour on Bitcoin. Cryptos aren’t subject to regulation, central banking supervision or many of the checks and balances of the modern money system.
Those are good reservations to have, but shouldn’t stop us from exploring alternatives to the reserve banking system, which has had obvious problems in the past.
Goldman Sour On Cryptos — For Now
“There is no doubt that the rise in bitcoin’s price has pushed it into bubble territory,” the report states on page 37. “While we do not know if Bitcoin or any other cryptocurrency will double or triple from prevailing prices, we do not believe that these cryptocurrencies will retain their value in the long run in their current incarnation.”
Does this mean that Goldman might be a big crypto player in the future? They could be, but it sounds like they are looking for more market transparency and faster trading.
The Bubble Problem…
Few mainstream investors are saying that the run-up in crypto prices isn’t a bubble. They are looking at past bubbles and the length of time to took for prices to accelerate.
Jeremy Grantham compared Bitcoin’s price curve to that of the South Sea Company, Dutch Tulip Mania and stocks up until 1929. His graph was entitled “This is what a bubble looks like – acceleration, crazy behavior and nephews asking if they should buy.” I heard him speak at CFA Society Chicago on Tuesday. He’s a globally known value investor with GMO LLC.
Most manias, it should be noted, are characterized by non-investors plunging in at the worst-possible time – and not getting out before losing their shirts.
Exchanges Are Leading The Way
While futures are not direct regulation, they certainly give investors large and small a way to further bet on cryptocurrencies. And those trades could go both ways.
The latest news is NASDAQ is going to offer Bitcoin futures later this year. It’s worth nothing that the more exchanges get involved, the more rules will be put in place on trading and transparency. This is generally a positive development.
Government Regulators Are Getting Involved
In order to have a transparent and fair market, you have to know who’s trading what and when.
Although proponents of cryptocurrencies argue that blockchain allows users to see transactions, it’s still not clear who’s buying and selling.
That’s why the U.S. Securities and Exchange Commission is holding off on approving Bitcoin exchange-traded funds and other pooled vehicles.
Even South Korea wants to know who the big traders are, which is always helpful in stemming market manipulation. Initial coin offerings of cryptos is another concern.
SEC Chairman Jay Clayton issued this caution last month:
“I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. ”
The World Economic Forum (Davos) Warning…
Finally, some of the world’s most influential leaders are cautious about cryptos. Although most of them represent the establishment of big banks and government, they are often on the mark on current trends.
Here’s what Axel Weber, chairman of the giant Swiss bank UBS said at Davos earlier this week: “This is not an investment we would advise.”
Weber joins a long list of crypto skeptics from Warren Buffet to Prof. Robert Shiller, a Nobel Prize winner. What do all of these big shots have in common? A healthy dose of intelligence about markets and behavior.
While I think cryptos have a future, like any tech-related trend, you’ll be best advised to sit out on the sidelines to see who the survivors will be. There will be more losers than winners, at least in the interim.
John F. Wasik is the author of “Lightning Strikes,” “Keynes’s Way to Wealth”and 15 other books on innovation, money and life. Follow him on Twitter and Facebook.