Market Comment: Bitcoin & digital currencies: a Q&A

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Headlines about Bitcoins and other crypto-currencies have multiplied as the price of Bitcoins has sky rocketed. In this Q&A, Richard de Groot, Global Head, Investment Centre and Chair of the ABN AMRO Investment Committee, provides answers to investor questions about crypto-currencies. In general, he is deterred by their volatile and unregulated nature and believes that the market is not yet developed enough for investors to step in.

1. Are digital or crypto-currencies a new asset class?

No, we do not believe digital currencies are a new asset class. An asset class is traditionally defined as a broad group of investments that tend to react similarly in different market conditions. They are also generally governed by the same rules and regulations. It is easy to see how the three basic asset classes of stocks, bonds and cash (money market instruments) can fall within this definition. Looking at the nontransparent, unregulated and speculative nature of Bitcoins or other digital currencies, it is hard to make the argument that it represents a new asset class. There is also a very limited track record to observe performance or to determine the impact of market conditions – if any.

2. Do you recommend investing in Bitcoins or other digital currency?

No, we do not think that Bitcoins or other crypto-currencies are suitable for investors. The Bitcoin market, for example, is incredibly volatile. There is also a lack of transparency and liquidity is low. It is also a market that is not regulated by banking supervisors or governments, therefore possibly exposing it to manipulation. Buying Bitcoins is therefore extremely speculative and not something we would recommend for (longer term) investors.

3. Bitcoins have risen in value in 2017 from USD 1000 to now more than USD 18,000. Is this a danger to the financial system?

No, we do not think the financial system is in danger. The amount of Bitcoins and other digital currencies is still very small in comparison to other currencies. The value of Bitcoin, however, has risen very quickly and attracted a lot of attention. It could be that after all the attention, a serious correction in Bitcoin value could temporarily affect broader market sentiment. But no long-term impact is expected. The scale is still too small.

4. What about blockchain, the technology behind digital currencies. Is this a new risk or an opportunity for investors?

Blockchain, also known as distributed ledger technology, is the technology behind digital currencies. Blockchain enables data to be updated and stored across a network of computers around the world, instead of at a single location. ABN AMRO is itself investigating the potential of blockchain to transform data exchange. It can support many more applications than just digital currencies and is a solution for exchanging information among different parties with 100% reliability and transparency. We believe that blockchain technology will play an increasingly important role in the future of financial services industry.

5. Do you think digital currencies will be a component of the financial system in the future?

I must admit I like the concept. Technology and growing consumer interest could push the growth of digital currencies faster and farther than expected. It is an interesting transformation, as people apparently begin to appear to trust technology more than governments – the traditional gatekeepers of currencies.
For investors, however, I think it is too early to identify the digital currency “winners” of the future. The situation now reminds me of the early 1990s,when a number of search engines were competing for dominance. Bitcoin could be the Alta Vista of search engines – an early leader, but subsequently overtaken by a more dominant competitor. Right now, there are more than 1,300 different digital currencies. It will be interesting to see how they develop and are applied to everyday use. So far, crypto-currencies are used much more as a speculative investment vehicle than to actually pay for goods and services, which is their original purpose. However, the thought that this might change in the future, in combination with the limited amount of Bitcoins available, is one of the driving forces behind the speculation.
The market, however, does bear watching, and we do not exclude that a regulated, digital currency could be introduced and accepted in the future. Digital currencies, and certainly the blockchain technology behind them, are something that we will be keeping an eye on in the future.