- Bitcoin has many hallmarks of a speculative bubble, according new research from TS Lombard.
- The report argues that investors seeking an inflation hedge would be better off buying gold.
- “Cryptocurrencies look bubbly, displaying many of the classic markers of a speculative mania,” the report said.
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Cryptocurrencies look “bubbly” and have many of the classic markers of a speculative mania, according to a research report from TS Lombard.
The research firm spelled out clear parallels with previous financial bubbles and cryptocurrencies, “especially Tulipmania,” according to the report.
TS Lombard pointed out that the surge in tulip prices in 1636 happened amid a pandemic, just like the recent surge in crypto happened amid the COVID-19 pandemic as “bored bros” put their stimulus checks into the speculative asset class.
During the tulip bubble, “many tulip traders had excess cash, inheriting it from relatives who had died in the Plague,” according to the report. But the speculative price surges could reverse as that extra spending money dwindles and the pandemic subsides.
“If a big part of the price run-up is speculative, it could reverse as policy support fades and people return to their offices,” the report explained.
Many current investors in cryptocurrencies like bitcoin believe it will serve as a hedge against rising inflation, but the report concludes that there is no evidence that will play out, as cryptocurrencies have been positively correlated with equities.
“In terms of their diversification properties, it is not clear cryptocurrencies will provide the ‘insurance’ characteristics investors are looking for,” the report explained. Bitcoin prices plunged 32% last March amid the onset of the pandemic, almost exactly the same drawdown of the S&P 500.
And in the past week, both bitcoin and ether fell more than 30% in a single day as a cryptocurrency meltdown spread throughout the sector.
For an inflation hedge that has proven its worth during an extended period of rising prices, TS Lombard points investors to gold, which did well during a period of high inflation in the 1970s.
“To the extent investors are worried about medium-term inflation risks, they should probably hedge this threat using traditional securities such as gold and various subsectors of the equity market, rather than punt around in volatile crypto assets,” the report said.
But cryptocurrencies are not going away, especially as institutions get more involved in the space, and some aspects of the DeFi capabilities are “intriguing,” according to TS Lombard. The firm points investors to ethereum, as it could “provide the infrastructure for an entirely new global financial infrastructure and has many potential applications in the finance industry beyond the token’s use as a ‘safe asset,” the report said.
“In buying ether, institutional investors are arguably buying a ‘ticket’ to access the programmable technology that underpins it,” TS Lombard concluded.