Bitcoin: What is in store? – BMO CM

Sal Guatieri, Senior Economist at BMO Capital Markets, suggests that with a market cap of more than $137 billion (equal to Taiwan’s GDP), bitcoin is garnering more attention from investors.

Key Quotes

“It’s important to distinguish between the technology running bitcoin (i.e., the decentralized digital ledger of every bitcoin transaction since inception in 2009) and bitcoin the currency. Most industry leaders believe that blockchain technology will endure if not thrive. It promises big savings for financial firms that use it to securely process payments and for governments that could use it to, say, record real estate property titles. Bitcoin needs the blockchain to exist, but the blockchain doesn’t need bitcoin. It can run on any currency of choice, including old-fashioned fiat currencies.”

“Bitcoin—and the hundreds of digital currencies that have mushroomed this year—is not a currency in the conventional sense of the word. True, you can use it to buy stuff from retailers and persons who are willing to accept it, or to transfer funds between countries without the prying eyes of regulators. But it has no tangible value. It is only worth what buyers and sellers believe it is worth. This is different from fiat currencies, which are backed by governments and taxpayers.”

“Since bitcoin has no intrinsic value, it is very vulnerable to shifts in investor sentiment. Unlike assets such as real estate, commodities and fiat currencies, bitcoin is not tethered to the economy.”

“To convince more people and businesses that it is a valid store of value, bitcoin will need to get off the rollercoaster it’s been riding since inception. But there is little evidence of such. In early September, the price plunged 36% to $3,200 from around $5,000, before soaring 134% to $7,500 in the next two months. It then took another gut-wrenching drop of 20% over four days to below $6,000, before soaring 37% to its current level. A roulette ball is steadier. Compare this wild ride with the Canadian dollar, which over a similar three-month span traded within a 6% range against the greenback.”

“And yet, despite many high-profile sceptics, bitcoin’s price continues to trend higher. That’s because there are more eager buyers than twitchy sellers. Bitcoin holders are reluctant to sell because they expect the price to keep rising, and the same trend-is-your-friend mindset compels prospective buyers to jump on for the ride (after taking Gravol). Unless market psychology changes, bitcoin could climb even further. Indeed, the current benign financial climate that is incenting investor complacency and risk taking (in almost all assets not just cyber-currencies) could persist for a while. Central banks are holding policy rates below inflation, even in some countries where workers are nearly fully employed. That said, this doesn’t mean bitcoin (or other assets) will stay at current levels if investors start worrying more about capital preservation than appreciation.”

“An important test for bitcoin could come soon. The CME Group plans to open a bitcoin futures market by year-end, subject to regulatory approval from the Commodity Futures Trading Commission. This will give sceptics the ability to sell bitcoin short in hopes of buying it back at a lower price. In essence, bitcoin’s price could fall if there are more sceptics who believe it is a bubble (and are willing to put their money where their mouth is) than enthusiasts who think otherwise. It promises to be a thrilling ride, so hold onto your digital seats.”