14 Mar Allianz says bitcoin bubble ready to burst
In a post late last week, Stefan Hofrichter, head of global economics and strategy at Allianz Global Investors, says “It appears to us that bitcoin mania is a textbook-like bubble – and one that is probably just about to burst.”
We haven’t seen such negative sentiment since JPMorgan Chase CEO Jamie Dimon repeatedly told us in late 2017, that the bitcoin bubble was ready to burst any minute.
Investment manager Allianz has more than $618.3 billion in assets under management. It has been in business for more than 125 years since it started as Allianz Insurance in 1890 in Berlin.
That’s why you would expect more insight than was delivered.
Allianz’s business and investment philosophy is summed up in two words. Understand. Act.
You might want to add in a third word – Criticize.
Let’s look at Hofrichter’s criticism of cryptocurrency in five takeaways:
- Between December 2017 and February 2018, bitcoin’s price fell by around half, but this probably isn’t the end of the bitcoin bubble
- Bitcoin meets all the essential criteria for any asset-class bubble, including overtrading, a lack of regulation and the potential for swindles
- Bitcoin has no intrinsic value: it is a claim on nobody – unlike sovereign bonds, equities or paper money – and doesn’t generate any income
- We don’t view bitcoin as a currency due to its high transaction costs, tremendous price volatility and inability to be a true store of value
- Despite our concerns about bitcoin, its underlying blockchain technology has merit – particularly its ability to reduce financial-transaction costs.
So far, the bitcoin criticism is relevant, but it parrots what others have said in the past.
If you look at the list above, many of the same claims could be made about the stock market, gold, foreign exchange trading, mortgages, housing prices and other investment vehicles. Something Hofrichter acknowledges.
Not a currency – not ESG-friendly
Allianz is spot on when it says bitcoin doesn’t work as a currency because of its high cost of transactions, price volatility and risk of using it as a store of value.
It consumes as much energy as Ireland and has inadequate governance. Those are some serious issues but blockchain innovators are already tackling some of these shortcomings.
Blockchain has its benefits
Blockchain is the one bright side to bitcoin according to Hofrichter:
“Despite our concerns about bitcoin, its underlying blockchain (or distributed-ledger) technology clearly has potential merits – not least of which is blockchain’s ability to reduce significantly the costs of verifying transactions and networking. This is prompting a range of financial institutions, including central banks, to explore blockchain more closely and to evaluate practical applications – including conducting financial transactions.”
Same old, same old
I kept looking for some new insights to strengthen the arguments against bitcoin versus other investments. I couldn’t find any that were simply in the category of ‘its new, we don’t understand it, and were not sure that we want to give up on the other investments that we make money on.’
What would be more valuable from traditional investment leaders in the future is a more thorough understanding of bitcoin and blockchain. That includes an open mind and exploration of the technologies driving the cryptocurrency and technology below the surface.
Frankly, when the next stock market crash hits, I wonder what our global investment advisors will be recommending then?
Few of those developing cryptocurrency and blockchain technologies are unaware of the potential problems and risks.
Other cryptocurrency pioneers are looking to understand bitcoin and blockchain better. Developers are using new funding vehicles to innovate and accelerate new technologies. We would be better served if there was more exploration of these technologies and possibilities than a simple dismissal because “it’s new.”
Let’s remember that insurance was once a new concept as well. And fintech has disrupted the financial services sector hugely the past three years alone. We can do better than criticize without understanding and exploration.