Recently, UBS Wealth, one of the world’s largest asset management firms, published a research opinion piece. This research viewpoint argues that the value of cryptocurrencies will likely go to zero due to regulatory measures and the competition generated by the emergence of better-designed versions. Investors who hold crypto-digital currencies stand to lose their assets as a result. Bitcoin is the largest crypto-digital currency, so UBS’s view includes Bitcoin as well and apparently, UBS thinks it is very likely that the value of bitcoin will likewise go to zero.
Different views and investment options from mainstream financial institutions
It is very interesting to note that the mainstream financial institutions are now starting to see a strong divergence in their views on Bitcoin.
DBS Bank, the largest commercial bank in Singapore, has plans to start offering bitcoin trading services. Fidelity, the largest U.S. asset manager, has begun offering custody services for bitcoin. Morgan Stanley holds bitcoin indirectly by buying 10% of MicroStrategy’s stock, one of the largest companies in the world in terms of the number of bitcoins it owns. As a result, Morgan Stanley indirectly holds a large amount of bitcoin. MassMutual Insurance, which has been in business for over 150 years, has also started buying bitcoin. Researchers at some mainstream financial institutions have also started to sing the praises of bitcoin. For example, researchers at Citibank believe that bitcoin will rise to $300,000 by the end of 2021. Researchers at JPMorgan believe bitcoin will rise to $146,000 in the long term. These mainstream financial institutions are expressing their approval of bitcoin while also investing their own money in bitcoin in real terms.
At the other extreme, some mainstream financial institutions still hold a very negative view of Bitcoin. In addition to UBS’s view, there is also a research view from Bank of America. This view sees bitcoin as the mother of all bubbles. Wells Fargo also sees bitcoin as a highly speculative product. But it also believes that a phenomenon that has been going on for 12 years, like Bitcoin, cannot be considered as a bubble.
In short, the position on bitcoin is currently at a very controversial stage among mainstream financial institutions. One could say that these views on bitcoin are on a continuum. At one extreme, they are strongly opposed to it, and at the other extreme, they are extremely supportive. So is it possible that Bitcoin could potentially go to zero in value as UBS is proposing? I think there is a valid part of UBS’s argument, but another part is debatable.
The Impact of Regulation on Bitcoin
First, in terms of regulation of bitcoin. Financial regulators in major global economies are bound to cause significant shocks in the price of bitcoin when they take action on aspects related to it. And these financial regulators will definitely take such measures. So the chances of a big drop in bitcoin prices are still very high. In fact, I’ve always believed that regulatory measures are the grey rhino factor that affects the price of bitcoin. The impact of this gray rhino is not whether it will happen, but when it will happen, who it will hit, and how big the impact will be as a result of the impact. It is important for bitcoin holders to have a clear judgment on this.
But, again, I don’t think that regulatory measures on Bitcoin will completely eliminate Bitcoin. Bitcoin is now generally recognized as an asset. So there is no reason for regulators to redefine the nature of Bitcoin, and Bitcoin will continue to exist. The other key thing is that after some of the regulatory measures are implemented, the operations of bitcoin will be brought under the purview of regulation. This will, on the one hand, limit the highly speculative nature of bitcoin, and therefore limit the large volatility of its price. On the other hand, it will also create a solid foundation for capital to flow into bitcoin. Funds held by institutions worldwide would thus be able to flow freely into and out of bitcoin. And this will provide the potential for further appreciation of bitcoin.
Competition from stablecoins
Another argument from UBS is that the launch of a stablecoin would create very strong competition to bitcoin and therefore cause its market demand to decline. I think there is a valid side to this argument. But the competitive effect that a stablecoin would have on bitcoin would never be as great as UBS suggests.
First, stablecoins have advantages over existing fiat currency circulation mechanisms, especially in terms of cross-border transfers and transactions. In terms of the geographical scope of circulation, stablecoins also flow to places that are beyond the reach of existing fiat circulation mechanisms. In terms of supporting the trading of digital assets, stablecoins have unparalleled advantages. So after the launch of stablecoin, it will definitely be widely adopted. But it has a small overlap in terms of competition with Bitcoin. They are still mainly focused on different markets, so there will not be the most direct face-to-face competition. And on the other hand, since stablecoins provide easier access to bitcoin transactions, they will instead drive the price of bitcoin up further.
Article from Gu Yanxi, Founder of Liyan Consulting
Translated by Yang(Mengyan Finance)