The People’s Bank of China (PBoC) issued last week a statement banning ICOs, while also planning to shut down local cryptocurrency exchanges. In order to combat capital flight, money laundering and other fraudulent activities, Chinese authorities have decided to disallow trading between fiat currencies and digital currencies within China. This has led to prices of cryptocurrencies such as bitcoin sliding over the weekend.
Alberto Perrucchini, next generation analyst at Julius Baer recommends “staying clear of bitcoin and the cryptocurrencies space”, which is fuelled by media interest, exuberant speculation and ‘FOMO’ (fear of missing out).
We do not see the fast price appreciation as fundamentally justified, and highly suspect a bubble.
Cryptocurrencies are immature technologies facing severe governance, scale and technological issues, and are handicapped by poor linkages to the non-crypto and non-black economy, including all-important credit and payment systems. Currently, bitcoin is the largest cryptocurrency thanks to its large network and ‘brand premium’. As Perrucchini explained:
However, new cryptocurrencies emerge on a daily basis, claiming to resolve particular issues or have superior tech. This has led bitcoin to lose market share over time as alternative cryptocurrencies emerged. Furthermore, there is almost no link to the real economy as only 3 of the top 500 online retailers accept bitcoin or any other cryptocurrency as a means of payment (down from 5 a year ago).
Lastly, bitcoin processes fewer transactions per unit of time than other payment systems (e.g. credit cards, online payments) and costs more (higher transaction fees). ICOs lack regulation and oversight, and there is no guarantee or protection for ICO investors.