Analysts at JP Morgan performed a sobering assessment of Bitcoin along with the market frenzy surrounding the digital currency, but concluded that Bitcoin is an “economic side show” and a poor hedge against a decline in equity prices.
Since March last year, Bitcoin has risen eightfold and has added more than $900 billion in market value, reaching a record high on Wednesday above $52,000
But the soaring price of the world’s biggest digital currency is well above JP Morgan’s estimates of fair value and the mainstream adoption of bitcoin increases its correlation with cyclical assets, which reduces the benefits of diversifying into bitcoin, the investment bank said in a memo.
“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” JP Morgan analysts said.
Fueled by speculations of its wide acceptance among mainstream investors, Bitcoin surged by 45% during the past two weeks, with Tesla’s CEO Elon Musk stating that owning bitcoin was only a little better than holding cash. He also defended Tesla’s recent purchase of $1.5 billion of bitcoin.
Some of bitcoin’s supporters have argued that the cryptocurrency is “digital” gold that can hedge against inflation and declines in the dollar, according to Reuters.
Based on that logic, bitcoin would need to rise to $146,000 in the long-term for its market capitalization to equal total private-sector investment in gold via exchange-traded funds or bars and coins, JP Morgan analysts said.
But despite the seemingly increasing acceptance of the digital currency by mainstream investors and companies, such as Tesla, Mastercard and BNY Mellon, many observers remain skeptical of the unregulated and highly volatile digital asset. Analysts are warning investors to exercise caution, stating that bitcoin is still far from becoming a widely used form of payment.
“Bitcoin presently is not an efficient manner for high-volume transacting, and it is certainly not a store of value as its price volatility at 80% is a dozen times higher than the euro and sevenfold of the Russian rouble,” said Harley Bassman, managing partner at Simplify Asset Management.
“That said, it is a perfectly legitimate speculative asset, quite similar to Dutch tulips in 1636. Will it meet the same fate? That is unclear. As such, size your risk appropriately.”