UBS says bitcoin is a bubble and too volatile to diversify a portfolio, unlike gold — here's why the bank says it could end up 'worthless'

  • Bitcoin has rallied over 1017% since last March. Tesla said on Monday it bought $1.5 billion.
  • UBS says that the asset is in a bubble and its volatility undermines its use as a hedge.
  • If the crypto cannot replace gold as a hedge, then bitcoin will have no value and be “worthless”.
  • Visit the Business section of Insider for more stories.

Bitcoin is one of the star performers of the decade so far and, in the last six months in particular, it has run hard – maybe too hard. 

Since March, bitcoin has rallied by over 1,000%, taking markets by storm and attracting attention, not only from institutional investors, but also the world’s richest man – Elon Musk, chief executive of electric vehicle maker Tesla and space exploration company SpaceX.

However, bitcoin is highly volatile. At more than $40,000, it is in a bubble, and for all its current popularity, if it does not replace gold as a portfolio diversifier, that bubble will pop, according to Kiran Ganesh, managing director and multi-asset strategist at UBS Wealth Management.

“If it’s not seen as a new gold and it doesn’t have any value from a practical standpoint, then it’s hard to justify values above zero,” Ganesh told Insider. “We don’t see it as a currency, or something that’s going to be useful in the world at any time,” he added.

Bitcoin’s historic run has been the subject of hot debate across the investment community, from JPMorgan CEO Jamie Dimon calling it a “bit of a fraud” in 2017 to the bank touting a case for the price of bitcoin hitting $146,000.

Why is bitcoin a bubble?

A bubble occurs when investors – pushed by herd mentality – send an asset well above its fair value in a comparatively short space of time. With rhetoric like “bitcoin to the moon” swirling around on social media, and day-traders jumping on the crypto-bandwagon, it’s not hard to see why many investors are worried that the price has risen too far, too fast.

Bitcoin is highly sensitive even to the mood on social media. It rallied 15% in a day when Tesla CEO Elon Musk put #bitcoin in his Twitter bio in January. On Monday, the price spiked 10% to a record high above $43,000 on news that Tesla bought $1.5 bln of bitcoin and would accept order payments in the digital currency.

Ganesh believes that part of the problem with bitcoin is that it isn’t a currency and any difficulties in using it for day-to-day transactions is the least of its worries.

Moreover, for it to be considered a currency, bitcoin would need to be an inherent store of value. For UBS, this will not be the case given that new cryptocurrencies can be launched whenever and wherever, Ganesh added.

A key characteristic of bubble buying is where investors purchase an asset in the hope that it may have some use in the future and bet on others being willing to buy it at a higher price, rather than because it has any practical application today. Both of these behaviours are on display when it comes to bitcoin, Ganesh said.

For UBS, bitcoin certainly “ticks the boxes of a bubble… The question is, does it burst?” Ganesh said.

Gunning for gold

The only way to avoid this fate is for bitcoin to replace gold – another asset that ticks many of these “bubble boxes,” Ganesh said.

Gold has spent the best part of the last 30 to 40 years trading well above its practical value as a metal used in jewellery and industrial applications. Instead, investors have bought it largely as a diversifier and because of the ‘brand’ the precious metal carries, Ganesh noted.

So there is “room in investor psychology to accept some assets that you own, ‘just because’,” Ganesh said, and bitcoin will need to challenge gold for this position to have any value.

Traditionally, investors have held gold as a safe-haven that can easily be liquidated in times of extreme financial-market stress, rather than as an asset with practical applications. 

But, for the moment, that sort of role is inconceivable for bitcoin.

Bitcoin is “much too volatile for us to even consider putting into any portfolios as a meaningful diversifier, because the volatility just blows any diversification benefit out of the water,” Ganesh said.

UBS will monitor over time whether bitcoin can start to attain some form of “brand value” similar to gold, but even if this happens, it is in the far off future.

“Gold has been valued for centuries, so I think that we can be reasonably confident that people see some additional appeal to gold over its practical uses,” Ganesh added.

If bitcoin goes ‘pop’, what happens?

No bubble bursting is pretty. The dot-com bubble at the turn of the millennium brought down entire companies, wiping out investors’ savings. 

If bitcoin is unable to replace gold as a “just because” asset then, much like the retail-trader run-up in shares of GameStop in January, people will realize that sometimes there is “a need to have a value for something that you pay money for,” Ganesh said.

If bitcoin doesn’t have any value then “of course it could be worthless,” Ganesh told Insider, and people must keep that in mind if they’re investing in it.

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