Bitcoin is losing its allure among speculators and may be headed for an epic collapse at some point in the near future, Allianz Global Investors has warned. Price action over the past two days seems to corroborate the view that the world’s first virtual currency could be headed for a correction.
The Bitcoin Bubble
In a blog post last week, Allianz strategist Stefan Hofrichter warned investors of the “potentially fatal flaws” of bitcoin that could lead to its ultimate unravelling. Although the cryptocurrency is unlikely to lose its hype anytime soon, it has all the characteristics of a major bubble. In his view, bitcoin’s ultimate correction is all but a foregone conclusion.
“It appears to us that bitcoin mania is a textbook-like bubble — and one that is probably just about to burst,” Hofrichter wrote. “As a currency and asset class, bitcoin has potentially fatal flaws — which is why we believe it’s a matter of when, not if, the bitcoin bubble will pop.”
Some of the warning signs Hofrichter describes are a massive surge in trading volume, insufficient regulation “the potential for swindles.”
Not surprisingly, Hofrichter disagreed with the claim that bitcoin represents the new gold, insisting that the digital asset lacks intrinsic value and does not generate any income. He also disputed the idea that bitcoin is a viable currency, given the high transaction costs and limited adoption among merchants.
When it comes to institutional investors, Hofrichter’s evaluation is hardly unique. Much like his peers, he has discounted bitcoin’s potential as an alternative to inflationary fiat money and has failed to consider the industry’s ongoing efforts to make digital assets more transaction-friendly.
The Allianz strategist was also consistent with his peers in praising blockchain technology, which is enjoying greater institutional support. Applications for public ledger technology are currently being explored in the public, private and academic sectors.
Markets on Edge
The cryptocurrency market has suffered multiple selloffs recently, as regulatory concerns, cyber attacks and a ban on crypto-related advertising by Google triggered a bearish reversal for the digital asset class. Bitcoin bottomed around $7,600 on Thursday, its lowest in about five weeks. Other coins have quickly followed suite, sending the total market cap to a low of around $309 billion on Thursday.
Some investors are losing hope that ICOs will generate more promising assets after a survey found that nearly half of all token raises issued last year failed. The upsurge in token raises has resulted in more than 1,500 coins being put in circulation.
Despite the recent volatility, bitcoin may still be poised for a breakout in the not-too-distant future – something Hofrichter didn’t deny in his bearish evaluation. The market has generated ever-growing interest from institutional traders, retail investors and speculators. However, their renewed interest could hinge on lawmakers providing greater regulatory clarity.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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