With bitcoin clawing its way back up and interest in cryptocurrency still top of mind for all sorts of investors, Vanguard's Joe Davis is often asked about the prospects for the leading digital currency. The global chief economist for one of the world's largest fund companies has one prediction as to where bitcoin is headed: to zero.
"I’m enthusiastic about the blockchain technology that makes bitcoin possible. In fact, Vanguard is using such technology," wrote Davis in a recent blog post. "As for Bitcoin the currency? I see a decent probability that its price goes to zero."
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The way Davis sees it, calling bitcoin and other cryptocurrencies an actual currency is a bit of a stretch. On the one hand, these instruments qualify as a legitimate currency in that they are a unit of account and a medium of exchange, even though the number of vendors that currently accept cryptocurrencies is limited. But Davis said that bitcoin is not a store of value because of its volatility. Few vendors can accept a currency when the value is moving dramatically either up or down on any given day or even hour, hurting adoption and acceptance. "Even if cryptocurrencies qualify for niche purposes, their prospects seem dubious," wrote Davis in the post.
As for cryptocurrencies as an investment, Davis said that case is weak too, given cryptocurrency does not generate any cash flows like interest payments or dividends, nor can its value be based on economic fundamentals. Instead, prices are dependent more on speculation about eventual uses and adoptions, which creates volatility and thus undermines the value of the cryptocurrency.
Davis does not even see cryptocurrencies as a way to play the blockchain movement, even though blockchain technology makes digital currencies possible. "Although cryptocurrencies are built using a blockchain, they are not necessarily tied to the value of blockchain applications that may improve the cost, speed and security of executing transactions or contracts. Bitcoin is an investment in blockchain in the same way that Pets.com was an investment in the internet," wrote Davis.
The Vanguard economist noted that, for investors to gain bitcoin exposure, it would mean reducing their positions in stocks, bonds and cash – the foundations of a well-diversified investment portfolio. "With no cash flows and extreme volatility, the investment case for bitcoin is hardly compelling," he wrote, noting that blockchain technology development is in the early stages with the expansion of the technology to come over decades. "As innovation quickens and competition increases, the majority of networks (and their associated cryptocurrencies) may be rendered obsolete, leaving many cryptocurrencies like tulip bulbs in 17th-century Holland – soaring to incredible heights before the speculative bubble pops. And, unlike tulips, they don't look nice in a vase," wrote Davis.