As more and more investors pile into cryptocurrencies, traditional finance circles are slowly pivoting from a fear of the unknown asset to a fear of missing out.
The price of bitcoin has risen almost fivefold this year to surpass US$5,500, prompting apprehensive interest among those in mainstream finance. More and more managers are admitting that, far from being a flash-in-the-pan fad, the rush into cryptocurrencies is likely to persist, reported the Financial Times
Several firms still have reservations, but are softening their positions in the face of growing investor demand. More and more members of traditional finance are also showing interest in learning more about the esoteric asset class. “We don’t want our clients to go near this stuff, but we will have to find a way to make it available if they keep asking,” one private-banking firm based in London told the Times
Renowned fund managers, however, are coming out to say that they’re at least dabbling in the digital assets. Mike Novogratz, a former hedge-fund manager at Fortress, recently suggested that he’d made at least US$250 million in profit from buying bitcoin and ether. He also announced plans to launch a hedge fund devoted to trading cryptocurrencies — not that he thinks they’re fundamentally valuable.
“This is going to be the largest bubble of our lifetimes,” he reportedly said in an interview. “You can make a whole lot of money on the way up, and we plan on it.”
Kyle Bass, famous for his highly lucrative short bet against subprime mortgages, has also had a change of heart on bitcoin, declaring that he thinks it’s “here to stay.”
Still, doubts remain prevalent. When asked for their take on bitcoin, the heads of JPMorgan and Citigroup last week acknowledged that the blockchain technology underpinning it is valuable, but were dismissive of the currency itself. Other big names and traditional finance have pointed to regulator crackdowns on cryptocurrencies around the world, further asserting that bitcoin is mainly useful for criminals and money launderers.
Cryptocurrency valuation is another critical sticking point. While many are starting to accept that investors and bankers need a basic understanding of the innovative assets, there’s still no agreement on how people can plausibly assign value to the volatile coins.
“Bubbles nearly always occur when there is something new, or relatively new in the economy,” said UBS’s wealth-management team in a written briefing to clients. “Change, by definition, creates uncertainty about the future. The tulips of the 17th century were new and exotic.”
UBS was referring to the “tulip mania” of the Dutch golden age, in which contracted prices for the newly introduced tulip reached incredible heights – then dramatically collapsed in 1637. Many consider the rise and fall of tulip prices to be the first recorded speculative bubble.
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