An economist at one of the world’s largest asset managers believes there is a “decent probability” that the bitcoin price will eventually crash to zero.
Joe Davis, the chief economist for $5.1 trillion asset manager Vanguard, wrote in an ETF.com op-edthat although the firm is enthusiastic about blockchain technology in general, it does not believe cryptocurrencies constitute a viable use case.”
“I’m enthusiastic about the blockchain technology that makes bitcoin possible. In fact, Vanguard is using such technology. As for bitcoin the currency? I see a decent probability that its price goes to zero.”
Davis argued that bitcoin should not be classified as money, because although it could qualify as a unit of account and medium of exchange it is not an effective store of value. Moreover, he said that its current valuation is based purely on speculation rather than economic fundamentals.
“The investment case for cryptocurrencies is weak. Unlike stocks and bonds, currencies generate no cash flows such as interest payments or dividends that can explain their prices. National currencies derive their prices from the underlying economic activity of the countries that issue them. Cryptocurrency prices, on the other hand, are generally not based on economic fundamentals. To date, their prices have depended more on speculation about their eventual adoption and use.”
He further warned investors against allocating even a small percentage of their assets to bitcoin, as this will reduce their exposure to “tried and true asset classes” in favor of an asset class whose investment case is “hardly compelling.”
“As innovation quickens and competition increases, the majority of networks (and their associated cryptocurrencies) may be rendered obsolete, leaving many cryptocurrencies like tulip bulbs in 17th-century Holland—soaring to incredible heights before the speculative bubble pops,” he said, parroting a common-but-dubious analogy. “And, unlike tulips, they don’t look very nice in a vase.”
Davis isn’t the first Vanguard executive to disparage bitcoin as an investment and cryptocurrencies as an asset class. Last year, Vanguard Group founder John Bogle advised investors to “avoid bitcoin like the plague” since it has no underlying rate of return. “When it gets back to $100, we’ll talk,” he said.
Other asset managers, however, are beginning to warm to the nascent cryptocurrency industry. Goldman Sachs is preparing to launch a bitcoin trading operation, and even JPMorgan — whose CEO, Jamie Dimon, has long been one of bitcoin’s most outspoken opponents — may soon help its clientsinvest in cryptocurrency.