Bitcoin prices are in a bubble that appears destined to burst at any point in the near future, Allianz Global Investors has warned.
In an online post, reported on by CNBC, Stefan Hofrichter, head of global economics and strategy at the asset manager, said the hype surrounding the world’s biggest cryptocurrency might not vanish for some time yet, and may even help the digital coin to stage a recovery after posting sharp losses since the beginning of the year. However, Hofrichter is convinced that bitcoin will eventually lose its allure once investors recognize its many “potentially fatal flaws.” (See also: Bitcoin Price Spirals Toward $8,000 After Google Bans Cryptocurrency Ads.)
"It appears to us that bitcoin mania is a textbook-like bubble — and one that is probably just about to burst," he said. "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."
Hofrichter came to this bearish conclusion after establishing that bitcoin “ticks all of the boxes” that Allianz Global considers to be “essential criteria of any asset bubble.” Warning signs include a fivefold surge in trading volumes over the last five years, a lack of financial regulation and the “potential for swindles,” the post added.
Hofrichter also disputed claims from some bitcoin enthusiasts that the digital coin is the new gold. Bitcoin, he said, offers no intrinsic value because it does not have a claim to the assets of a government or company and doesn’t generate any income. Hofrichter similarly ruled out suggestions that bitcoin functions as a viable currency, due to high transaction costs, sharp price volatility and its inability to be a true store of value, and described the high level of energy required to produce the cryptocurrency as unfriendly from an environmental, social and governanceperspective.
Perhaps unsurprisingly, Hofrichter did, however, have some good things to say about the technology that powers bitcoin. Like many of his peers, the economist applauded how blockchain is able to lower costs on verifying transactions by eliminating the need for third-party intermediaries such as banks.
“The blockchain technology that powers cryptocurrencies could bring significant benefits to investors,” he said. "It is this aspect of cryptocurrencies in general — and not the specific cryptocurrency du jour — that we as an asset-management firm find to be the most interesting.” (See also: Thomson Reuters Now Providing Bitcoin Sentiment Data.)